Frost defies the sceptics

THE INVESTMENT COLUMN

Frost has defied the sceptics who, on the petrol retailer's return to the market in 1991, doubted whether the 75-station chain could compete with the integrated oil giants and the supermarkets which were then entering the market. Its shares have almost quadrupled since refloatation after an unhappy period under the ownership of failed property group Norfolk House.

During that period the company has grown rapidly, reaching 236 outlets by the end of last year. Despite sharp fluctuations in the petrol price as the major players scrabbled for share in what is a pretty mature market, earnings have pushed ahead nicely.

Frost was transformed in July, however, when it snapped up almost 200 petrol stations from Burmah Castrol for pounds 83m. Overnight, it became Britain's fifth largest petrol retailer, just behind Texaco, but ahead of Mobil, Jet and Q8.

The deal, financed by a one-for-three rights issue, was completed after the end of the half year, which meant that interim profits announced yesterday told only half the story. They were, however, sparkling figures - pre- tax profits up 15 per cent to pounds 5.6m led to a 21 per cent rise in earnings per share and allowed a dividend 19 per cent higher at 3.2p to be paid.

It will clearly be a defining acquisition for the company and analysts believe the full effects will only show through after a couple of years. Frost believes there is enormous scope to reduce costs and increase volumes - Burmah operated a similar number of stations to Frost with three times as many staff - which explained the full price it was prepared to pay.

On the basis of forecast profits of pounds 15m this year and pounds 21m next time, the shares, unchanged yesterday at 246p, stand on a prospective p/e of 15. They deserve a premium to the market, but with the uncertainty of the integration, the shares are now high enough.