Food groups sustain Grand Met

The Investment Column

Grand Metropolitan has always been a follower of fashion. In the late Eighties it was a trendy conglomerate, paying top dollar for just about anything that moved, even if it did get out of hotels at the top of the cycle.

When recession struck, and the virtues of focus on core activities suddenly became apparent, Grand Met zeroed in on branded food and drinks at the expense of a costly exit from peripheral pursuits.

But under Lord Sheppard the deals just kept on flowing and one of his last acts was to pay pounds 1.8bn for Pet Inc, the branded US foods group, just over a year ago.

All this wheeler-dealing, while supposedly delivering enhanced earnings in year one, brought next to no benefit to shareholders. Amazingly, for almost a decade, the return on the group's pounds 10bn of total capital has been below its average weighted cost of capital. Which makes you wonder what, in investment terms, is the point of Grand Met at all?

Clearly the new management team under John McGrath has been grappling with this question and is trying to draw a line under the past by using the language of the present.

The latest wheeze is a share buy-back plan - an obvious move for cash- rich companies but less clearly beneficial for Grand Met, which boasts gearing of 74 per cent and net borrowings of pounds 2.7bn.

The idea is not so off-the-wall as it might seem. Grand Met's debt is far cheaper than its cost of equity, so reducing the number of shares in issue makes sense. Equally, the pounds 190m interest bill is comfortably covered over six times by operating profit. But investors should not hold their breath as knotty advance corporation tax problems mean the buy-back is unlikely to see the light of day until 1998.

In the meantime, they can console themselves with good performances from the group's two main profit centres - Pillsbury food and IDV drinks - though operating profits at Burger King fell from pounds 196m to pounds 167m, due in part to a pounds 10m hit caused by difficult trading in the UK and Germany caused by the BSE crisis.

At the pre-tax level, profits were reduced by 58 per cent to pounds 388m after a pounds 550m exceptional charge arising from the sale of the Pearle eye-care chain in the US and some European food businesses. More disposals in the latter category will follow as Grand Met concentrates on four international brands - Haagen-Dazs ice cream, Pillsbury baked goods, Green Giant vegetables and El Paso Mexican food.

Analysts reduced their pre-tax forecasts by about pounds 50m to pounds 1bn to take account of sterling's recent strength against the dollar. That puts the shares, down 10.5p at 446p, on a market multiple of just over 14. High enough.

New Hanson lacks focus

Lord Hanson is doing his best to bow out of the corporate battleground in a blaze of glory. Having paid pounds 300m for "bolt-on" acquisitions in the past two years, raised pounds 2.1bn from disposals in the past year and announced the division of his empire into four separately quoted companies, the impression is of a whirlwind of activity at his eponymously named conglomerate.

Sadly the City has remained unimpressed and the shares have underperformed the rest of the market by more than 40 per cent since the demerger was announced in January, despite yesterday's 0.25p uptick to 80p.

The latest pronouncement shows that the experts were right to be cynical, as Hanson proudly proclaimed record profits of pounds 1.81m in its last year as an undivided conglomerate. The figures are now largely irrelevant, given the demerger on the last day of the year of the new Millennium Chemicals and Imperial Tobacco groups and the forthcoming split from the energy operations in January. Even so, they give an insight into the problems facing the group. Strip away exceptionals, principally the massive pounds 633m profits from disposals and a pounds 193m release of provisions for contaminated land in the US, and Hanson's operating profits, at pounds 1.53m, are flat as a pancake.

"New Hanson" must be seen as a much more focused group, with leading positions in aggregates, ready-mixed concrete, bricks, cranes and electrical products in the UK and the US. Once the remaining debt of around pounds 1.4bn has been unloaded on to the new Energy Group, new Hanson will also be financially strong, with gearing of around 25 per cent.

It is also well managed, doing well to hold on to profits of pounds 231m last year, down just pounds 6m despite difficult conditions in the UK. Brick prices fell just 3 per cent, while aggregates demand fell to levels not seen since the 1970s. The strong performance from the US and Grove cranes should continue.

Analysts are putting a fair value of around 88p on the remaining Hanson entity, after a conglomerates discount, with new Hanson worth upwards of 38p. Even if a bid does not emerge for Energy, the shares should be held at least until the dust settles.

London Clubs deals a dud

Casino group London Clubs International has turned in such a jackpot- winning performance since its flotation in May 1994 that yesterday's downbeat announcement represents the group's first dud hand.

Having trebled in two and a half years, the shares retreated 8.5p to 316p following flat half-year profits of pounds 20m and a gloomy trading statement.

What dented confidence was news that in October and November the percentage of bets retained had been disappointing at upmarket casinos, including The Ritz and Les Ambassadeurs in the capital. The high level of sterling may be one factor keeping high-rolling overseas gamblers away.

But in a sense London Clubs is a victim of its past success, as the top clubs have seen spectacular gains in the past two years. The luxury end of the market's unpredictability is the reason London Clubs has been reducing its dependence on this sector. A year ago the upmarket clubs accounted for 69 per cent of profits. Now the figure is52 per cent, with the balance coming from middle and lower market casinos.

London Clubs is also expanding its overseas interests to balance the portfolio. It already has an Egyptian operation and this week it opened the refurbished Casino du Liban in Beirut, a project which is tipped for great things despite its unpropitious surroundings.

There will be further opportunities in the UK as a result of the deregulation proposals working their way through Government channels. Possible relaxations include an increase in the number of gaming machines and 13 new permitted areas for casinos.

The proposed relocation of the Ritz casino to larger premises should also increase returns and the group has recently agreed lease terms for new premises for its Rendezvous club.

Flat full-year profits of around pounds 33m would put the shares on a forward rating of 21. Still worth holding.

REX/Eye Candy
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