Gambles pay off at Land Securities

The Investment Column

Land Securities yesterday did something it has not done for at least four years by dazzling analysts with an unexpectedly good set of annual figures and strongly hinting at more to come. Britain's biggest property group is often seen as a ponderous behemoth, slow to change, while younger, more nimble groups move into exciting new areas like out- of-town shopping centres and retail shed developments.

In fact, under retiring chief executive Sir Peter Hunt, the group has been more far-sighted than many, taking gambles in the teeth of the early 1990s property slump to launch what has become a pounds 400m development programme. The fruits of that spending, which has added something like 10 per cent to the portfolio of retail and office property, are borne out in the latest results.

Pre-tax profits up 2.6 per cent to pounds 244m were boosted by property sales, so the underlying revenue figure actually showed a small 1.3 per cent decline to pounds 236m. But the real meat yesterday came in the chunky 13 per cent increase in net assets per share to 783p.

As can be seen from the step change in yield from 8.3 to 7.8 per cent on the underlying pounds 5.3bn portfolio, there can be little doubt that the property market is on the move again. This figure, which excludes underperforming properties scheduled for development, has been helped by the link to falling gilt yields, which of course dropped again recently as a result of the move to give more freedom to the Bank of England to set interest rates.

Equally, the recovery in the property market has itself been patchy. The growth rates in Land Sec's portfolio range from 2.8 per cent for offices in the City of London to 18 per cent for retail sheds and food superstores. The development programme, already worth over pounds 500m on current yields, has helped skew the portfolio further towards the sexier retail end of the market, which now accounts for 53 per cent of the whole. The next 3 million sq ft programme, due to begin in December 1998 with projects like theMarineau Galleries retail redevelopment in Birmingham, will only increase the bias towards shopping.

There remains, however, a tail of underperformers at Land Securities. Some 16 per cent of its properties are still in the sluggish City, with another 30 per cent in the patchy West End of London. The problem can be overstated though: the hangover of "over rented" central London sites from the 1980s, where lease renewals will come nowhere near matching previous rent levels, will not hit the annual rent roll by more than pounds 5.8m in the next five years, the company reckons.

If Labour moves to further tighten planning rules for out of town retail developments, that should redound to the benefit of Land Sec's mainly city-centre properties. The only question is whether Ian Henderson, who moves up from deputy to managing director next year, can fill Sir Peter's experienced shoes. At a 3 per cent discount to BZW's net assets forecast of 903p for next year, the shares, up 29.5p to 873.5p, look fairly valued. Hold.

Hotel problems cloud Bass results

The brewing sector has lost some momentum in recent months and Bass is no exception. After a strong run which lasted for the whole of 1995 and most of last year, the shares have come off their January peak of 875p. They fell a further 22.5p to 798.5p yesterday, despite half-year profits in line with expectations at pounds 318m. In fact, the City's worries about the company lay elsewhere.

Though the uncertainty over whether or not the Carlsberg-Tetley takeover is sanctioned by the Monopolies & Mergers Commission is one concern, it is not the greatest. The major trading issue is the Holiday Inn hotels business, where growth has slowed. The number of rooms only increased by 0.25 per cent over last year and most of the new rooms coming on stream are in lower-margin budget accommodation rather than in full-service hotels.

The second issue is acquisitions. The City feels the Bass balance sheet is under-utilised and that the company needs a major deal to drive earnings forward. A bid for the William Hill chain of betting shops is one possibility, though Bass could have picked the business up last year for far less than the pounds 600-pounds 700m it would have to pay now.

The City is therefore equally concerned that Bass will pay a big strategic premium, either for William Hill or a hotels chain. Hill would make a good fit with Bass's Coral chain, which had a bumper half, helped by the cancellation of fewer winter race meetings and improved margins.

Elsewhere in the leisure division, Gala bingo saw profits fall by almost a third due to intense competition and a drop in admissions. Its average customer is diverted into spending pounds 6 a week on the National Lottery.

In Bass Taverns, the expansion of branded outlets continues with the new O'Neills Irish bar format and more Harvest Inns, while the Fork & Pitcher outlets have been renamed Vintage Inns to suit its older audience better.

In branded drinks, Hooper's Hooch continues to dominate the alcopop market with a 60 per cent share, though sales growth has slowed to 16 per cent on last year. On full-year forecasts of pounds 728m, the shares trade on a forward rating of 15 falling to 14. Hold.

Courtaulds leaves troubles behind

Courtaulds' shares have been under a cloud of late, hit by concerns about the pound and other matters. But yesterday the market was in the mood to be a little more charitable, marking the shares up 24.5p to 330.5p. The problems of two years ago, when the price of key raw materials like wood pulp and acrylo nitrile soared, are now well and truly in the past.

The other local difficulties have been well flagged. The seemingly ever- present problems with currency are well known, while Courtaulds signalled that it was having problems with over-capacity in the viscose market when it announced plans to cut 20 per cent of its European production in February.

So while the 2 per cent rise in pre-tax profits to pounds 134m in the year to March looked modest, part of the performance was masked by a pounds 14m contribution last time from discontinued operations like Amtico floors and the cellophane business. There was plenty to be hopeful about in the underlying group.

Tencel, the new fibre on which Courtaulds has lavished pounds 400m so far, including pounds 60m last year, has at last broken into profit. The group is coy about how profitable it is, but David Ingles at James Capel reckons it could have chipped in pounds 14m on just under pounds 100m sales last year. That augurs well for the third production line due on stream in Grimsby later this year and the next Tencel plant, due to be built in Korea, Indonesia or Singapore.

Meanwhile, the group's long-term plan to build sales of other products in the Far East is also starting to pay off, with a 45 per cent jump in profits to pounds 16m from the area. Worldwide coatings and sealants, still by far the biggest product division, is suffering from the cheaper dollar on translation, but Courtaulds' strong position in niche areas like solvent- free powder coatings and aircraft sealants is reaping good underlying growth.

Viscose remains the dog of the portfolio, producing a small loss last year. It will not show real improvement until the industry cuts more capacity.

But assuming Capel's forecast of pounds 150m is realised this year, the shares, on a forward p/e of 14, look reasonable value.

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