There's plenty of growth still untapped at Scottish & Newcastle

Downside risks make the LSE one to avoid; Countryside looks as if it will build on its promises

In one fell swoop, 2002 has been the year that Scottish & Newcastle transformed itself from a staid mature brewer, who considered France an exciting market, into a business capable of giving even South African Breweries (now SABMiller) a run for its money in growth markets such as India.

The takeover of Hartwell in February gave S&N 50 per cent of Russia's biggest brewer through the Finnish group's stake in Baltic Beverage. It usefully added to S&N's portfolio in markets where young drinkers are only just waking up to the appeal of a pint. S&N, best known for its John Smith's, Kronenbourg and Newcastle Brown Ale beer brands in the UK, is open to the idea of more expansion, once it has raised some cash from selling its 1,500-strong pubs division.

The pubs represent the big outstanding issue facing S&N. The City has long called for the retail division (which includes the Chef & Brewer and Rat & Parrot chains) to be hived off but after a merger with Six Continents' pubs business fell through recently, S&N has insisted it will hang on to the management contracts of its pubs and restaurants. A complex and mysterious transaction, which could release up to £2bn of cash, is expected within the next six months.

While S&N shares have been an investment portfolio stalwart in recent months, they fared badly on Six Continent's revelation last week that its own pubs demerger meant it was slashing its dividend. S&N furiously insists its progressive dividend policy will remain intact even when its pubs deal comes. Analysts are relaxed at the dividend cover of just 1.5 times, pointing to strong cashflows from its brewing arm. At 6 per cent, the yield alone underpins the stock's attraction, but investors should watch out for developments next year.

S&N confirmed yesterday it is comfortable with current trading and confident of meeting full-year forecasts of £520m pre-tax profits. This is despite a "variable" and damp summer. The group is expected to deliver earnings growth of 5 per cent in the year to April 2003, and 9 per cent the year after, which analysts believe is not currently priced in. With the final £2bn payment to Danone for the 2000 takeover of Kronenbourg done and dusted last week, it is time to look forward. Buy.

Downside risks make the LSE one to avoid

September was a month of records for the London Stock Exchange. It saw its busiest trading day on 20 September, when the expiry of complicated futures contracts sent the market into chaos. And the month was one of the most volatile, ending as the worst month for shares since the crash of 1987. Since the LSE takes a tiny sliver of all the trades that cross its books, that made September a lucrative month indeed.

In its monthly statistical bulletin, released yesterday, the LSE showed a 5 per cent increase in the number of trades in September, to 4.6 billion. That despite the fact September 2001 included the terrorist attacks on the US and the subsequent stock market plunge. For the first nine months of 2002, the number of trades on the LSE has been 38.8 billion, up 9 per cent. The proportion of trades which now go through the Exchange's electronic trading platform (from which the LSE makes more money) has hit 65 per cent.

So "broker services", the trading platform part of the LSE's business, is doing well despite – indeed, partly because of – the bear market. For "issuer services", it is a different story. This is the part of the LSE that profits from companies listed on the Exchange, and there have been few new ones of those. There were just three initial public offerings raising just £22.4m in September, down from £75.3m in 2001.

The latest signs are that the final strand to the LSE's business, "information services", is holding up okay-ish despite the investment banking recession. The number of terminals bought by banks to pump out trading information direct from the LSE has declined. Although the number of registered users is static, that is unlikely to continue to be the case.

The sum of these parts? A solid but unexciting business with risks on the downside. Off 10p at 308p, the shares are on 15 times Merrill Lynch's forecast of current year earnings, a price which doesn't reflect the chance future forecasts may have to be cut. Avoid.

Countryside looks as if it will build on its promises

No need to worry after all. Countryside Properties had a rather disappointing set of interim results back in May, and there was a sceptical eyebrow or two raised when Graham Cherry, the chief executive, said he expected a stonking second half would ensure the company hit its full-year profit forecasts. Yesterday, he repeated it again and, with the crucial six months' trading finally in the bag, it seems annual results in November will indeed show the expected £34m profit, up from £30.4m last time.

The company suffered delays to a number of commercial property sales and to several building projects it is carrying out on behalf of housing associations. These have all come right in the past few months. Countryside has an impressive land-bank of its own and an enviable record of getting planning permissions. But its commercial property interests and exposure to house prices in the South-east could hold it back. The 16 per cent rise in forward sales revealed yesterday is modest compared to its peers.

This column advised taking profits shortly after the shares hit their high of 222p in May. In the intervening period, the price has fallen to 174p and the price-earnings ratio to 6, while the chance of a hike in interest rates to smother the housing boom has disappeared. The disconnect between these two is such that Countryside shares look a solid hold once again.