Euro Disney an expensive fantasy

THE INVESTMENT COLUMN
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The Independent Online
Shares in Euro Disney have a history of performing all the magical leaps and bounds of one of the French theme park's best rides. Yesterday produced another fantasy trip when the shares edged up 4p to 154p on the back of reduced first-quarter losses, whilst ignoring various looming charges that hang over the group.

First, the fantasy. The market drew comfort from an upbeat set of figures for the three months to the end of December which showed that Euro Disney's losses almost halved from Fr109m (pounds 13.9m) last year to Fr57m this time. Sales were also up 17 per cent to Fr1bn. Attendances and hotel occupancy figures have been boosted by last April's price cuts of 20 per cent, though the company did not release details yesterday.

There was further encouragement from news that the public service strikes had not dented sales at the end of last year.

But the reality for Euro Disney shareholders is rather more sober. The main problem is the interest and royalty holidays which are still flattering the group's figures but are already starting to run out. The company began a phased process of interest payments last September and will pay an estimated Fr120m in charges this year. Lease and other financial charges have already increased by Fr37m in the quarter. Management fees and royalties to Walt Disney, which owns 39 per cent of Euro Disney, start in 1999.

By some estimates, the company will have to increase sales 50 per cent over the next three years to cover these additional burdens and justify its current share price. Though the company has improved sales significantly this year due to lower prices, this is likely to prove a one-off boost. On top of this, Disneyland Paris - as the park itself is known - is battling against a strong franc which makes the attraction expensive for foreign visitors, particularly those from Britain.

All this makes November's announcement of the company's first profit look tame, particularly as Fr112m of the Fr114m profit was due to the repurchase of its convertible bond.

Paribas, a long-standing bear of Euro Disney, says that at the current price, the shares are trading on a massive 50 times reported earnings. The broker is forecasting a pre-exceptional profit of Fr177m but a post- exceptional loss, after interest payments, of Fr303m for the full year.

After a roller-coaster 1995, when the shares rose to 245p in May only to end the year not much higher than they started at 140p, this year is likely to be just as volatile. Even after yesterday's figures, the shares look as risky as ever.

Annus horribilis for Domino

Last year was an annus horribilis for Domino Printing Sciences, the maker of the ink jet printers used to put sell-by dates on food products. In the early part of 1995, problems with the print heads on some of its new machines led to additional costs of pounds 1m and around pounds 2m lost sales.

But worse was to come. In September and November, it was forced to issue profits warnings after it emerged that dud ink was congealing in the printers, clogging the jets and, as it turns out, wiping out most of the second- half results.

Domino reckons that that cost pounds 3m directly, with a further pounds 5m hit to the sales line.

Domino has moved with commendable speed to deal with its problems, taking a pounds 1.5m charge to rationalise its headquarters and two loss-making operations. But the net result was a cut in pre-tax profits from pounds 13m to pounds 5.16m for the year to October.

Domino now fervently hopes that last year's difficulties are a thing of the past and has pegged the dividend at 10.1p, despite the bare earnings cover. The building momentum behind sales since the year end gives weight to this optimism and there is no question that the company continues to operate in an exciting market.

Industrial ink jet sales are thought to have jumped a fifth to around pounds 600m last year and new applications, like identification for car parts, and new geographical markets are still being developed.

But last year's problems have weakened Domino's number two position in the market, which has slipped by an underlying 1 percentage point to 17 per cent.

It has also done itself no favours with investors after spending pounds 8.3m in shares and cash on three acquisitions at the end of 1994, which have collectively racked up losses of pounds 500,000. Meanwhile, net cash is down from pounds 16.3m in 1994 to pounds 3m currently, although it is expected to recover.

Profits this year of pounds 13m would put the shares at 409p, up 5p, on a prospective multiple of 13. Hold.

Re-branding

aids Shandwick

Shandwick, the public relations group, had a near-death experience in the early 1990s, after a buying spree left it with huge debts and no assets. The company's bankers have got used to net assets permanently in the red at "people-based" businesses and, at pounds 43m in October, Shandwick's deficit on shareholders' funds is the lowest it has been this decade.

In fact, it has almost completely rehabilitated itself from the problems of the past, as a recent long-term financing deal and yesterday's results demonstrate. Reported pre-tax profits dived from pounds 7.33m to pounds 2.53m in the year to October. But stripping out goodwill on the disposal of the Kaufman advertising business in the US and other proposed sales, there was an underlying rise of 5 per cent to pounds 7.7m. A final dividend of 0.87p pegs the total payout at 1.3p for last year.

The sale of Kaufman and the proposed exit from two printing business will end Shandwick's restructuring. Its new concentration on pure public relations and its size, where it is second in the world only to Young & Rubicam's Burson-Marsteller, have allowed the group to cash in on the emerging trend for big clients to demand a global service.

The re-branding of the formerly disparate US businesses under the Shandwick banner is already helping to pull in clients. The recent capture of computer giant Digital Equipment, which is expected to become one of the group's top five clients within a year, was said to be directly related to Shandwick's newly-raised profile.

PR companies tend to grow faster than the general economy in good times, so profits of pounds 9m should be possible this year, putting the shares, down 3p at 41.5p, on a forward multiple of 9. With more than half the revenue coming from across the Atlantic, Shandwick remains heavily dependent on the US market. Even so, the shares still look reasonable value, a view supported by Julian Treger and Brian Myerson, whose UK Active Value Fund recently raised its stake to just over 10 per cent.

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