Land Securities feeling economic chill

Dairy Crest; Radstone Technology
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The Independent Online

When this column last reviewed Land Securities, the UK's biggest quoted property company, we advised shareholders to take profits. The economic storm has been gathering ever since, and the stock is now an outright sell.

Interim results yesterday were disappointing and the value of LandSecs' portfolio of properties, mainly in central London, has fallen since the last time it was surveyed in March. Like-for-like, the valuation had slipped by 0.4 per cent by 30 September. Rental income from these properties was up 1.3 per cent, but came under serious pressure by the end of the period and actually fell on some of LandSecs' properties.

Among the least impressive performances were the West End offices and hotels in London, where conditions are getting even worse as the post- 11 September slump in tourism hits the area. The omens for commercial property valuations are grim indeed.

Ian Henderson, chief executive, has been trying to position Land Securities so that it is about more than just rents and net asset values, though. Its "integrated commercial property solution" sounds exciting and the first burst of contract wins from Trillium – the property management group it bought for £340m a year ago – gave it control of the BBC's properties. LandSecs will reap rewards in the long run, but for now it is losing money through start up costs and investment in new developments.

The market is still waiting for details of the £2.4bn sale and leaseback deal on BT's £2.4bn property portfolio, which Trillium is still negotiating. The prospect of doing a deal over London Underground's properties looks uncertain. And hoped-for smaller deals, perhaps with local authorities, are yet to come through. Analysts remain to be convinced of Trillium's potential.

And they are downright sniffy about LandFlex, LandSecs' small business offering, which will provide short-term leases in four London office blocks in a pilot project next year. The problems encountered by Regus, which saw demand disappear at the first sign of economic trouble, suggests that investors would be wise to be wary. With big corporations embarking on a spree of headcount reductions and downsizing, LandSecs is likely to find itself competing for tenants just as these corporations try to sub-let all their unwanted office space.

LandSecs shares fell 19.5p to 843.5p as analysts reduced forecasts for its net asset value in the short term. Sell.

Dairy Crest

Dairy Crest, the food manufacturer whose brands include Cathedral cheddar and Yoplait yoghurts, has been serving up a rich and creamy diet to investors over the last 18 months. In March 2000 the shares were curdling at a meagre 131.5p. Since then they have almost trebled and stood within a whisker of their all-time high yesterday at a distinctly full fat 372p.

The question is how much more is there to go? Partly, the rise has been due to a return to favour of Old Economy stocks after the end of the dot.com boom. The other key features have been the growth of Dairy Crest's main brands, which also include Frijj flavoured milk drinks, and the synergies achieved from the £246m acquisition of Unigate's milk and cheese business in July 2000.

Both those elements were on full view in yesterday's half year results. Adjusted profits for the six months to 30 September were up 39 per cent to £33.8m but all the growth came from one division – consumer foods, where the main brands all performed strongly.

The worry is the other division called food services. This includes the doorstep milk business which is being combined with the liquid milk operation acquired from Unigate. As part of a managed decline, the group achieved £11m of cost savings in the first half as the Unigate dairies are integrated, and it is on target for annualised savings of £25m. But the market for doorstep deliveries of milk fell by 12 per cent on last year and the company will have a tough job cutting costs faster than sales are falling.

Dairy Crest is achieving this for now and the new chief executive, Drummond Hall, who will succeed John Houliston who retires next July, ought to be able to deliver on house broker ABN Amro's forecast of earnings growth of 20 per cent this year and next.

But this may already be in the price. Assuming full-year profits of £73m the shares trade on a forward price-earnings ratio of just under 10. That may not seem particularly taxing but, after the terrific run this year, now is probably a good time to sell.

Radstone Technology

Since Radstone Technology is a supplier of computer hardware and "smart" technology to the Ministry of Defence and the US military, there is little surprise it should find itself in "the most positive market environment in its history". That was what chairman Rhys Williams was able to boast yesterday when he unveiled interim figures and told investors that the factors that led to a nasty profit warning in early September have now been decisively resolved.

A pre-tax loss of £1.0m for the six months to 30 September compared with a profit of £1.2m in 2000. The seemingly relentless growth in its order book had stalled as a US defence spending review took longer than expected, but that has now concluded with a giant hike in budgets. The value of Radstone's future orders is £72.3m, 21 per cent ahead of last year.

The shares, up 30p to 190.5p, are on 17 times forecast earnings for this year, falling to 11 times in 2002. They look attractive again.

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