Book chain is worth a buy

Cape looks like a good future hope
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The Independent Online

The bookshops sector has been going through something of a revolution. Ottakar's, which reported a 20 per cent rise in annual pre-tax profits to £6.1m, is the second biggest specialist chain in the UK.

The bookshops sector has been going through something of a revolution. Ottakar's, which reported a 20 per cent rise in annual pre-tax profits to £6.1m, is the second biggest specialist chain in the UK.

The sector, once seen as old-fashioned and in decline, has been enlivened by the arrival of US chains, the emergence of more enticing formats and huge excitement created by the likes of Harry Potter and popular history books.

Luckily for Ottakar's, reading is not in decline, even if the reading of literary or scholarly books is. As James Heneage, its managing director and co-founder, points out, films and television have turned out to be aids to book-buying, not competing media.

Ottakar's is very much at the populist end of the business, with WH Smith is closest competitor. It likes to make books fun, putting on events to tie in with new goods. The company has 121 stores, 35 of which have been converted into its "lifestyle" format, which includes a coffee shop. US entrants, led by Borders, have brought much bigger stores to the UK, including out-of-town book superstores. Ottakar's believes that its locationsmean that it is not threatened by these larger formats.

Last year, the company pulled off its biggest ever acquisition - the 24-strong chain of Hammicks bookshops - for £5.5m, including debt. Almost all of these stores have now been rebranded Ottakar's. As a result, sales were up 34 per cent but at the like-for-like level, sales were still a healthy 6.2 per cent higher.

The next couple of years should see increasing excitement around the children's character Tintin, about whom a major film trilogy will start to be released next year. The name Ottakar's is from the title of a Tintin book and the company owns the UK book store merchandise rights to the character.

Ottakar's shares closed at 381.5p, putting the stock on a forward multiple of 14. Given the growth prospects, it's a buy.

Cape looks like a good future hope

When a chairman describes his own company as a former "basket case", things must have been pretty bad. This is how the chairman Martin May saw Cape, the industrial maintenance and buildings materials company, when he joined two years ago. It was facing a huge litigation for asbestos poisoning, had reached its overdraft limits and one of its major divisions was loss-making.

Cape, which reported full-year results yesterday, has settled its asbestos court case with 7,500 South African miners for £7.5m, and reclaimed £12.5m from its insurers. Asbestos has not entirely gone away, however, and there are outstanding claims against Cape. But it says these are tailing off, and at £3m a year, are covered by its £16m of cash generation. The loss-making manufacturing division that made fire-proof boarding has been sold off. Banking facilities have been renegotiated and the company reduced its debt from £19m to £5m for the year ended 31 December.

Cape can now focus on its support services to the energy sector, which include everything from cleaning oil rigs to scaffolding to factory catering. The biggest potential here is in liquified natural gas. Cape maintains and insulates the freezing equipment required, and it expects this market to grow by 12 per cent a year.

Its reported annual turnover at its remaining business was up 19 per cent at £228m, and excluding the South African settlement, operating profits were up 33 per cent at £7.3m. It will be some time before Cape is rid of its asbestos problems but it is now on a footing for growth. At 75p, it is worth a speculative buy.

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