Leave out-of-fashion GUS in the cupboard

British Land; Synstar  
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The Independent Online

After the wobble of October's trading update, GUS has made a welcome return to form. The market took fright when GUS said the terrorist attacks on the United States had hit sales at its Burberry luxury goods brand as well as its Experian business information division in the US.

But yesterday's figures were better than expected, with underlying profits in the six months to 30 September up 11 per cent to £206m. Burberry and Experian are fighting back while the Argos retail division is still going like a train, with like-for-like sales up 13 per cent.

The big question about GUS remains its distinctly out-of-fashion conglomerate structure. Slowly but surely, its chief executive, John Peace, is addressing it. The £1bn-plus Burberry float is still planned to go ahead by June next year, while other smaller businesses have already been offloaded.

With Burberry, Mr Peace is keen not to rush the IPO. Yesterday's news that he will buy in the Asian franchises for "tens of millions" in January marks another step in the tidying up process. And though sales at the retail stores since 30 September are still down, the trend is improving. The Spanish and Japanese markets, which account for two-thirds of Burberry's retail sales, have remained resilient and wholesale volumes are also strong.

The next big question about GUS is the future of Experian. Mr Peace says there are important synergies, such as developing systems for the Argos store card and undertaking research for its home shopping division. GUS feels the business is mis-understood in the City which, it says, fails to appreciate its defensive qualities.

So far so good. But assuming full-year profits of £518m the shares – up 45p to a near 12-month high of 638.5p yesterday – trade on a forward price-earnings multiple of 15. That looks about right for now.

British Land

British Land, the UK's number three property company, has a great portfolio and was yesterday surprisingly upbeat on prospects. In these uncertain economic times it is hard for real estate to grow in value, and British Land's portfolio grew just 0.3 per cent to £9.24bn in the six months to 30 September. The group's jewels are the giant Broadgate Centre in the City and Sheffield's Meadowhall shopping centre.

John Ritblat, the chairman and chief executive, declared: "The strength of the portfolio ensures that there is no pessimism here."

The company has large, modern buildings, let out to strong tenants on long leases, which have an average of 18.5 years to run. In an economic environment where earnings visibility is minimal, British Land offers the security of being able to see nearly 20 years forward. Add to that its clever property financing, and you should have a compelling proposition.

However, up 12p to 462p yesterday, the stock trades 40 per cent below its net asset value – the sector average is a 32 per cent discount. An analysis by HSBC shows that in terms of total returns – share price growth plus dividend – British Land has performed poorly over the last 20 years. Over the last five, it is the worst of the major property companies.

The issue appears to be Mr Ritblat himself, who towers over his empire. With a reputation as a deal junkie, the market is terrified he'll squander the family silver on some big transaction. While he's there, the stock is likely to continue to underperform. Avoid.

Synstar

One of Synstar's more, ahem, "niche" clients must be the little European hotel that the computer services company has signed up in a contract worth just £60 a year.

That sort of deal typifies the problem Synstar faces. It must urgently reduce the number of low-margin customers so it can focus on selling additional services to its bigger clients.

Happily, and in the wake of a profit warning earlier this year, Synstar is now well into its restructuring. It has cut around 125 jobs so far, and is also starting to get results from cross-selling. Its 2,500-strong client base should have shrunk to 2,000 by June next year.

The year ended 30 September results don't make happy reading. Pre-tax losses totalled £21.3m, after accounting for exceptional items, compared with a £4.9m profit last time. Sales were flat at £238m. The economic environment is clearly doing the group no favours.

It is on track to boost revenues by 2 per cent this year with earnings of 3.3p or 3.4p per share. The average contract is for just over two years, so much of the coming year's sales are already in the bag.

It is difficult to compare Synstar to other IT companies. Some of its business competes with bits of Compaq, IBM and Computacenter, while in disaster recovery, it comes up against the likes of Guardian IT.

Down 7p to 54p, Synstar is trading on a forward multiple of around 15 times for the current year. While the company seems to be delivering on recent promises, economic conditions alone suggest it is too early to chase the shares.

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