Ailing Boots can regain its health

Put your bookings at Macdonald on hold; RM offers few exciting prospects
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The Independent Online

This week, Steve Russell packs his overnight case and departs from Boots, the chemist chain where he has worked for 36 years, the last three as chief executive.

His successor, Richard Baker, does not arrive to complete the management clear-out until September, but brokers are already setting out the structural changes he could make - and advising investors on their relative merits.

A note from UBS Warburg doing the rounds yesterday set out four likely directions, beginning at keeping the status quo and ending at a debt-backed buy-out of the company. The two in the middle both involve a step change in the beleaguered group's share buy-back programme and each could bring an impressive return for those willing to risk their dough on Mr Baker.

The most likely option is that Boots could take on more debt (it has plenty of headroom to do so) in order to finance an extra £1bn of buy-backs. And UBS has long hoped Boots will sell its BHI manufacturing business, which owns Clearasil, Strepsils and Nurofen. Returns on the equity invested in the division are not as high as at the core chain and selling it could make £2bn available for buying in stock.

None of this is very ambitious, but Boots is a company where ambition has rarely paid off. Investors are still smarting at the money wasted overseas and in trying to establish "Wellbeing" offerings such as Botox injections.

Investors need to look through the current problems. We already know figures for the year to March are going to be downbeat. Boots is chasing sales at the expense of margins, and has seemed unable to achieve profit and sales growth at the same time. Yet Mr Baker has an impressive record at Asda, which itself has a reputation as a retail industry business school.

Even UBS has not gone as far as telling clients to buy the stock. It assigns a percentage chance to each of its four scenarios, a share price it thinks the scenario would justify, and then averages the lot. It gets a 650p price target, but the new management will be tempted to plump for the option it believes will give the greatest share price. The upside could be more than UBS implies, particularly if Mr Baker gets the retail basic right.

The shares are worth a flutter and a dividend yield of close to 5 per cent should help investors sleep at night.

Put your bookings at Macdonald on hold

The Iraq war may have been over for some weeks but the outlook for hoteliers is no brighter. One by one, they warn the number of business travellers is down and Americans are still not willing to cross the Atlantic.

Yesterday it was Macdonald Hotels - the UK's eighth biggest operator. It reported another fall in the number of businesses booking its hotels as mid-week conference venues, leaving it chasing less profitable leisure bookings.

Macdonald, which also owns timeshares, wrung a 1 per cent rise in sales from the half-year to 3 April, but pre-tax profits fell 9 per cent.

The best news came from the group's predominantly four-star provincial hotel estate (where it makes 95 per cent of its profits), which saw revenue per available room, the important industry measure, rise by 2 per cent. This was offset by another disappointing six months for its so-called "M25 estate", which includes Oxford's Randolph Hotel.

Hard times notwithstanding, Macdonald is a uniquely well-run company. Where peers such as Hilton are happy to sell their assets in exchange for management contracts, Macdonald seeks joint-venture partners who will stump up cash for new properties while letting it keep an equity stake. It bought Heritage Hotels in April 2001, and is now developing down-at-heel Aviemore into a 21st century skiing resort.

With £100m of investment planned for its provincial estate, analysts are comfortable with estimates of 15 per cent-plus annual earnings growth. The shares, at 195p, are a hold.

RM offers few exciting prospects

The education funding crisis - which is forcing some schools to lay off teachers - could put a big hole in RM's financial planning.

The group sells software, hardware and IT services to schools and needs a load of new orders this term if it is to turn its first-half loss into the full-year profit the City is expecting. But it warned yesterday the crisis has clouded the outlook for sales and observers believe IT is suddenly a lot lower on headteachers' priority lists, now teachers' pension costs have shot up.

This comes at a bad time, since RM is just getting itself back on its feet. The share price has run ahead of the recovery and will have to come back down.

Tim Pearson, chief executive, was able to trumpet better-than-expected results for the six months to 31 March yesterday. Losses narrowed to £1.8m from £14.1m last time, thanks to a cost-cutting programme that axed 250 jobs.

The group also generates strong cashflows from its business but, with trading in the core schools business likely to worsen, RM is not finding replacement opportunities fast enough. It has moved into the wide-ranging "education services" arena and has won some interesting long-term contracts to introduce a new IT system across Northern Ireland's schools, to trial online SATs and to run an online learning project in South Yorkshire. But RM does not have the infrastructure to cope with many more such contracts for now, and has slimmed down its pipeline accordingly. It's all very unexciting and the stock, up 1.5p to 103.5p, is a sell.