McAlpine built on a solid foundation

Britannic; Thistle Hotels

Building contractors used to call a spade a spade. Now they are much more likely to call it an Infrastructure Service Provider. Alfred McAlpine used to be a builder, but now calls itself a capital projects and support services group. It still digs trenches.

The justification for this switch in language, which has helped the group attract a little of the sexiness of the support services sector to its share price, is last year's sale of the housebuilding division to George Wimpey. Now McAlpine is concentrating on higher-margin business areas which it believes have better growth prospects and less exposure to the economic cycle.

A trading update yesterday confirmed things are on track. The group said it has a forward order book of £1.3bn and has been short-listed for five big private finance initiative schemes. Last year's big acquisitions have helped build a significant presence in what McAlpine calls utility services, doing the maintenance and construction work outsourced by the UK's utility firms. Details of a joint venture between McAlpine and ScottishPower are due soon.

Such outsourcing is set to increase sharply as utility groups re-evaluate their core competences, but McAlpine's business is mainly blue collar, not as cerebral as some work in the support services sector. The group also remains a relatively small player and needs to bulk up significantly.

So what will McAlpine spend the proceeds of the housebuilding disposal on? That is the £463m question, and one of the main reasons its shares have gone nowhere since last summer. Investors have feared that the group will overpay in its haste to build scale, but the management has proved good deal makers so far and can be given the benefit of the doubt.

There is also the prospect of a £100m share buyback or special dividend to give new life to the shares. Assuming that is completed this year, the shares, up 20p to 419p trade on a forward multiple of about 15 times earnings. They are worth holding for the long-term.

Britannic

It is hard to get excited about insurance, so small wonder that Danny O'Neil would rather spend less time at Britannic, the UK's seventh-largest insurer, and more with his family. The disclosure that the new chief executive is stepping down could hardly have come at a worse time for the company, which is in the throes of a restructuring that saw 2,000 of its sales force leave last year.

There is no doubt that Britannic has some gems among its various businesses. The latest new business figures, out yesterday, showed a 10 per cent uplift in premiums from retail investment, life and pension products. The performance at Britannic Asset Management also met expectations. It wrote £751m of new business in 2001 against £788m last year, despite the impact that the equity market downturn has had on investor sentiment. Britannic Money, the company's start-up mortgage business, exceeded its sales target of £1bn.

But the company overall continues to suffer from the strategic switch, begun last year, from direct selling to distribution via independent financial advisers, with sales at Britannic Assurance down some 48 per cent. To be sure, there are signs that sales through IFAs are beginning to pick up the slack left by the departure of Britannic's sales force. However, the impression remains of a business comprised of interesting niches but lacking a core with any certain potential. That provides an opportunity for the new chief executive, but investors should be more concerned that the appointment is at least six months away. In the meantime the business risks drifting.

Analysts expect earnings per share of about 47.8p this year, and a dividend of 57p. The shares, down 5p at 740p, are too risky despite their tempting 7.7 per cent yield.

Thistle Hotels

The slump in tourism poses a thorny problem for Thistle Hotels. It cut 10 per cent of its staff in the aftermath of 11 September, and put all but essential maintenance work on hold at its 56 UK hotels. The question is, when should it plan for a recovery? It will face the same scramble for staff as the rest of the industry, and Thistle's management must be rueing the timing of their move upmarket over the past few years. When the group focused more on coach parties than on business travellers, it needed fewer staff to satisfy extra demand.

The chief executive, Ian Burke, says he is cautious on market conditions for at least the next six months. The timing of an upturn is, to be brutally honest, anybody's guess. Thistle revealed yesterday that turnover from 17 September to the end of last year was 19 per cent lower than in 2000, with a 26 per cent fall in London, where Thistle is the biggest operator with 22 hotels. Average room rates and occupancy levels are all on the slide.

There is still scepticism that Thistle can compete at the high end of the market with the likes of Hilton, global brands with global distribution systems. But for now the stock is a play on the timing of a recovery in economic activity and tourists' confidence.

Lehman Brothers, estimating a 10 per cent turnover slide in London over the course of this year and flat sales in the regions, has earnings per share falling another 24 per cent to 5.7p this year. UBS Warburg, taking an "armageddon scenario", predicts 5.1p. Down 5.5p to 112p, Thistle shares look expensive if UBS is right but, because of its exposure to the London market, they should be the fastest to gain from broker upgrades if the doom-mongers are wrong. Place your bets.