Hatfield still haunts improving Balfour

Balfour Beatty; Esporta; Brown & Jackson
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The Independent Online

Balfour Beatty, the construction and engineering group which was heavily criticised in the aftermath of the Hatfield rail crash, is one of those companies for whom the acronyms PFI (private finance initiative) and PPP (public-private partnership) are a godsend.

As the Government increasingly looks to involve the private sector in both the building and operation of public assets such as hospitals, schools and transport, the likes of Balfour Beatty, Amec and Capita are waiting to snap up the work.

Balfour Beatty is a 20 per cent shareholder in Metronet, the consortium which has preferred bidder status for the Bakerloo, Central and Victoria Tube lines in London. It is also bidding for the concession on the sub-surface District, Metropolitan, Circle and Hammersmith and City lines.

Political wrangling means it is at least a year before any of these contracts get rolling. But analysts reckon the Tube work could be worth £250m to £300m to Balfour Beatty. Add this to the £3.9bn order book the group already has and it is not hard to see the bull case for the shares.

The bear case may lie in the group's US exposure. But its civil engineering business will benefit from Washington's huge infrastructure programme. And its building services division is growing despite fears over the US economy.

The other weak spot has been UK civil engineering and specialist projects where work on installing overhead power lines has been disrupted by the foot-and-mouth crisis which has denied the company access to farmland. That knocked £3m off the division's profits in the six months to June. Despite this pre-exceptional profits were up 17 per cent to £41m which was ahead of expectations.

The real unknown is the fall-out from Hatfield where Balfour Beatty held the maintenance contract. The worst case scenario is that the company could be charged with corporate manslaughter. The other possibilities are charges against individuals or a fine.

Schroder Salomon Smith Barney is forecasting full year profits of £104m and a share price target of 210p. With the shares up 13.5p to 183.5p yesterday they trade on a forward p/e of 13. This is cheaper than Amec but with the Hatfield investigations still ongoing it may pay to wait.

Esporta

Much like its lycra-clad gym devotees, Esporta is struggling to shape its ever-expanding frame into a truly trim operation. The family-orientated fitness club operator has been energetically rolling out its premium outfits, both at home and abroad, since it demerged from First Leisure last year.

But as yesterday's interims show, Esporta's grandiose plans of doubling in size to 80 clubs over the next three years are taking their toll on profits. The large size of the chain's clubs require new builds on greenfield sites. The 11 clubs opened in the six months to 30 June, at around £3.5m a pop, meant pre-tax profit for the period dived 31 per cent to £3.1m. There was an exceptional write-down of £1.3m on the disposal of two smaller clubs, which it sold last week.

While Esporta is making the right moves with its European expansion plans, it is having to slash joining fees in new markets such as Sweden and Spain. France and Germany are the next targets in 2003. Despite a solid performance from Esporta's established clubs, with like-for-like sales growth of 6 per cent, the chain has yet to fully convince the City that it has found the right management to drive its vigorous expansion. Esporta's founder, Patrick Hendioz, left last year and it is already on its second finance director in six months.

The shares, down 5.5p yesterday at 99.5p, trade on a prospective p/e multiple of around 20, which makes it more expensive than its closest competitor, Holmes Place. The shares are a hold while Esporta gets into better shape.

Brown & Jackson

You get what you pay for when you shop at the likes of Poundstretcher and What Everyone Wants, and the same seems to have applied to shares in Brown & Jackson, their owner.

Back in November, B&J's shares looked a bargain when they stood at 76p, valuing the £400m-turnover business at £125m. The valuation, however, reflected the risk, and over the following months the share price has sunk to a close at just 38p yesterday.

Johan Visser, the chief executive, admits that the company committed the cardinal sin of retailing, by stocking products that no one wanted. Last year, What Everyone Wants bought truckloads of plain T-shirts just when patterned T-shirts were coming into vogue. Misguided buying also hampered The Famous Brunswick Warehouse, B&J's foray into branded goods. The result: a like-for-like sales decline last year of 5.9 per cent, alongside a fall in earnings per share from 14.8p to just 5.7p. Pre-tax profits down from £31.7m to £10.8m, in line with May's profit warning.

What Everyone Wants, which is the bulk of the business, is still troubled. But there is hope. New management is already delivering a turnaround at Poundstretcher and Your More Store. Indeed, their recovery saw groupwide like-for-like sales register a 1 per cent uptick in the first six weeks of the current financial year. Peel Hunt, the house broker, forecasts £19m of pre-tax profits and 8.1p of per share earnings this year.

Moreover, fears that the patience of B&J's main shareholder, South Africa's Tradehold, may be running out look unfounded now that it has hung on this long. The shares are worth a punt.

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