Full steam ahead at P&O as cruises offset ferry losses

Investment Column
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The Independent Online
edited by Tom Stevenson

It is a year now since Lord Sterling launched his charm offensive on P&O's increasingly disgruntled investors, promising them property sales, a flotation of the Bovis housebuilding arm and, most importantly, the novel idea of a focus on shareholder value via a return on capital target of 15 per cent.

Yesterday's full-year figures for 1996, which emerged at a much better than forecast pounds 332.8 (pounds 320.4m) showed the company making great strides on a number of fronts even if the gaping hole the Channel Tunnel has blown in the Ferries operation and a collapse in bulk shipping and container rates took the edge off the other activities.

Return on capital was pegged at 11.3 per cent (11.1 per cent) as a result but the target should be more than achievable if the mooted cost benefits of the shipping merger with Royal Nedlloyd come through and the Stena deal is passed by the MMC.

Star of the show was cruises, where the gap between P&O and its British rival Cunard has started to yawn. The division now accounts for one fifth of group assets and almost one third of profits and, at 16.9 per cent, its return on assets is right up with market leader Carnival of the US. With a 50 per cent increase in capacity in the pipeline, the company is taking a big gamble on this continuing to be one of the leisure industry's biggest growth areas.

Other strong performers were housebuilding, where Bovis jumped from pounds 17.1m profits to pounds 28.8m, and property development, where a firmer market in the US, UK and Australia drove profits more than 50 per cent higher to pounds 38.8m. Investment property remains a solid cash cow and the Australian arm is growing in importance.

Strong as they all were, however, they could do little to disguise the damage of a pounds 32.5m fall in profits from ferries to pounds 41m. Despite a 21 per cent growth in the number of tourist vehicles now crossing the Channel and a 10 per cent rise in freight, P&O's tourist volumes fell 8 per cent and the freight figure was merely maintained. It may go against the grain for the Government to sanction the creation of a ferry monopolist but the strength of the competitive threat from Eurotunnel means consolidation is inevitable.

P&O's shares have had a good year, recouping much of the underperformance since the beginning of 1995 that had many investors questioning whether Lord Sterling shouldn't really walk the plank. On the basis of forecast profits of about pounds 360m this year, the shares, up another 9p to 634.5p, trade on a prospective p/e ratio of 15 and yield 6 per cent, a long way off the 8 per cent you could have locked in a year ago but still an impressive income. Good value.

Booker pins hope on Nurdin

Booker, the cash and carry operator, has been a perennial under- achiever of late. Over the last five years its shares have fallen by 20 per cent and underperformed the FTSE All-Share by a chunky 54 per cent. Management has tried to tell a story of wringing out cash from the declining cash and carry sector to invest in higher-margin areas but the results have somehow always proved disappointing.

This was again true yesterday with some analysts complaining that the 1996 results were short of expectations, though Booker blamed analysts for racing ahead of themselves. The chief executive, Charles Bowen, maintains that the three-year strategy announced in 1995 was always to start delivering robust earnings growth by 1998.

That may yet happen, though there was little sign of it in yesterday's figures. Pre-tax profits excluding exceptionals were marginally ahead at pounds 102m. But there were pounds 89m of exceptional charges largely due to last year's pounds 264m acquisition of Nurdin & Peacock, the rival cash and carry group. Added to this was a pounds 1m hit for the BSE impact on the prepared foods business and a pounds 5m loss at Holroyd Meek, the catering operation.

The key issue is whether Booker can make its acquisition of Nurdin & Peacock work. It has already pledged to reduce costs by pounds 100m by next year. It says head office costs were higher than thought, leaving more scope for cutting, and that the purchasing benefits may be greater than anticipated. The rationale is that with a market share of 38 per cent and combined sales over pounds 4bn, it should be able to match the big multiples' buying muscle. The downside is that margins are wafer- thin and Booker's typical customers - corner shops and high street independents - are being squeezed by the supermarkets.

On analysts' forecasts of pounds 103m, the shares, down 4p yesterday to 333.5p, trade on a forward rating of 11. Given that companies in the same sector such as Unigate trade on similar ratings and have more reliable records, there is better value elsewhere.

Clubhaus tees up for take-off

Clubhaus has come a long way in the year since it floated on the market following a demerger from the Ex-Lands property company. With only a couple of golf courses 12 months ago, Clubhaus has rapidly acquired eight more to achieve the critical mass and economies of scale that should make the company stand out from the rest of the fragmented and undermanaged golf industry.

Turnover in the ten and a half months to December soared to pounds 7.3m, compared with just pounds 920,000 in the year to June 1995, from which an operating profit of pounds 1.1m, a 15 per cent margin, was struck. Earnings per share were 3.6p.

With over 6,000 members and over 165,000 rounds of golf played last year, Clubhaus is well placed to capitalise on the growing demand for golf in all the markets in which it operates.

Between 1994 and 1995 the numbers of golfers increased by more than 6 per cent in Britain and twice as fast in Germany, where the company has three courses. Last year saw numbers grow again and in both countries growth in demand continues to outstrip the supply of courses.

The trick for Clubhaus is to manage its pretty rapid growth and work out exactly at what level it wants to pitch its membership, both in social terms and price-wise. Currently it seems slightly unsure whether it is running premium members' clubs or more cheap and cheerful pay and play courses. Given that the company wants to encourage reciprocity of memberships between its constituent clubs and also its recently acquired Mayfair business club, it arguably needs more focus.

That said, Clubhaus is the only company attempting to bring big business disciplines to bear on the dilettante world of golf. A deal with Whitbread, saving pounds 100,000 on 19th-hole beer costs alone, is one example of how economies of scale can lead to significant savings. The payroll reductions achievable by merging management of courses is also considerable.

On the basis of forecast profits of pounds 3.8m, the shares, up 2p to 87.5p, currently trade on aprospective price/earnings multiple in the mid-teens. With the promise of free members cards for investors with an as yet unspecified holding, the shares look good value.