City File: Read between the lines at Pentos

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The Independent Online
PENTOS, the Dillons and Hatchards bookshops group, suffered a 74 per cent drop in pre-tax profits to just pounds 4m last year. But close inspection of the accounts reveals the figures could have been even worse.

Pentos has a policy of taking reverse premia - up-front incentive payments to rent property - as profits over two years. Clive Gregory, the group's finance director, declines to say how much these were worth but admits they were significant, and says that with the property market improving they will disappear.

Pentos only charged pounds 1.2m of depreciation on its pounds 69.2m of short-leasehold properties, although this was reduced by a pounds 1m excess charge in previous years. It also has a rapidly rising rent roll. The market predicts pounds 10m of profits for this year, but that could be a little optimistic.

WICKES, the DIY and timber group, is yet to start paying dividends again, and the shares trade at well over 20 times likely earnings. But the bulls are backing it as a classic recovery stock. DIY is booming and there are signs that it has finally stemmed years of enormous losses in the timber operations.

Wickes recently returned to profits of pounds 6.6m. Optimists look for pounds 19m this year and pounds 33m in 1994. However, the shares have soared from 78p to 115p this year, so much of the recovery is in the price. Sell.

Scottish mist

THE Scottish banks are riding high on the stock market. Bank of Scotland rose 4 per cent to 138 1/2 p on Friday and the Royal Bank was also buoyant. But next week's results could sober the bulls.

Mark Eady of NatWest Securities is warning against the market's excessive hopes for Royal Bank subsidiary Direct Line Insurance - a view echoed by Julian Robins of BZW: 'If all goes well, Direct Line could be contributing pounds 70- pounds 80m to profits within three or four years.' Nor is Robins a bull of Bank of Scotland: 'They have had three rights issues in eight years, and there could be more to come as they expand their loan book.'

Look elsewhere, maybe to Lloyds for solidity or Barclays for recovery.

TRIO HOLDINGS, which bought the money broker Martin Bierbaum for pounds 25m in December, has won a good following. This may be because the market-makers remember David Hagan, Trio's executive chairman, from when he ran the City's leading inter-dealer broker, Tullet & Tokyo Equities.

Mr Hagan is now getting to grips with Martin Bierbaum, which has spent the last five years suffering from lack of investment. It was controlled first by a cash-strapped parent and then by a consortium of banks.

Bierbaum in Dusseldorf is still Germany's leading money broker, and RP Martin has a strong position in a number of European currencies. Expect some interesting new recruits to the dealing rooms.

House to house

IF the market guru John Wriglesworth of UBS is right, house prices could be 10 per cent higher this time next year. That should be good news for housebuilders. But, according to Robert Donald of County NatWest, it is better for some than for others. He estimates that profits from George Wimpey, the second-largest builder, could be pounds 6m - or 25 per cent - higher this year. They could get to pounds 15.5m next year if house prices rise by 6.6 per cent in 1993 and 7.8 per cent in 1994, instead of his current forecast of 5 and 5.6 per cent.

The benefits for Tarmac, the largest housebuilder, are less pronounced because of its higher debts, although earnings per share in 1995 could be 17 per cent higher. But recent outperformance means there is little upside from the 135p price.

VICTAULIC, the pipeline products maker, is expected to strengthen its board shortly with a senior appointment. The news will help the shares, which have been suffering recently despite robust results. Worries about the group's dependency on British Gas, which has been cutting its spending, were behind the fall. But, say analysts, this appears to have been overdone. This year should see a doubling in Victaulic's net cash balance, currently pounds 6m.

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