City Talk: Beware British Energy burnout
Sunday 01 December 1996
Think of Whitbread (766.5p) and most people envisage pints of foaming ale. The truth is, in fact, quite different. The business has been reinventing itself over the last few years - into a major owner of restaurants, fast food outlets and leisure businesses. Whether the company has escaped the pressurised world of brewing to sunnier uplands remains to be seen.
Barely a week goes by without news of some further expansion or deal to consolidate its position as a broad-based leisure group. Last week, in a long-awaited move, Whitbread paid pounds 46m for Bright Reasons, the owner of Pizzaland and Bella Pasta Restaurants. With 180 outlets, the deal substantially increases its presence in the sector.
Shares were off on the day the deal was announced, with concerns that Whitbread is paying too much, too quickly to expand into new territory. This year alone, it has paid over pounds 527m on restaurant and hotel deals. More than pounds 255m of that went on goodwill.
Even so, these markets should continue to grow at a steady rate. The price paid for Bright Reasons itself was less than had been feared and the new businesses in themselves represent substantial opportunities for organic growth. Whitbread's new tack should pay off. Buy.
Attention is likely to switch back to LucasVarity, the offspring of the merger between Lucas, the automotive parts and brakes companies, and Varity, the US brakes concern. Victor Rice, the new chief executive, is driving the company hard. He has promised pounds 250m of disposals by the year end - far sooner than the market had been expecting. Mr Rice is keen to reiterate that pounds 120m of cost savings can be achieved within the next 18 months. The shares, now 253.5p, have come back to around their original level when they started trading in September, and look cheap by most benchmarks. Buy.
Storehouse, the BhS to Mothercare group, has problems. The retail team at stockbroker BZW has highlighted several anomalies in the group's costs. Although profits growth over the past two years has been strong - helped by a reported rise in costs of only 2 per cent. But delving into the report and accounts, the sleuths have discovered that costs have actually risen closer to 10 per cent. That suggests much of the increase in profits is, in fact, down to better cost controls - and not to higher selling prices. Coupled with poor sales densities at BhS, off 8.5 per cent in two years, there have to be question marks over sustained profits increases in the future. The shares, 261.5p, are a sell.
Highams, a supplier of IT products and services to insurance, banking and financial services, is set to join the AIM, in a move which should value it at upwards of pounds 6m. The business, set up 10 years ago by John Higham, has three arms: contract and permanent personnel, IT solutions and software for factoring. One of the areas where it sees substantial growth is in outsourcing, which it claims could grow by 70 per cent to the year 2000. The firm aims to raise pounds 650,000 in the float, with the shares likely to be priced at around 75p. With sales of pounds 13.2m and pre- tax profit of pounds 899,000 in 1996, this is one to follow.
Since its flotation, PPL Therapeutics, the Scottish biotechnology company, has remained on track for the commercialisation of its products in development - especially so for its alpha-1-antitrypsin for cystic fibrosis. With the share price off with the rest of the sector, now is a good time to buy.
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