Granada continues to sparkle

THE INVESTMENT COLUMN
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The Independent Online
Four years ago Granada's newly appointed chief executive had the unenviable task of announcing a 53 per cent plunge in profits and a slashed dividend. The shares languished at 185p.

Presenting another set of sparkling figures yesterday Gerry Robinson looked more relaxed. After a 2p rise to 604p, the share price now reflects the enormous strides he has made in reshaping the business - managing the decline of the formerly dominant rental operation and using its cash flow to fund expansion in the growing areas of TV and leisure.

Turnover up 19 per cent to pounds 1.12bn in the six months to April showed that the good news is still flowing and led to a 50 per cent rise in pre- tax profits to pounds 154.5m. After a 27 per cent rise in earnings per share to 17.7p the interim payout was 16 per cent better at 3.85p.

The acquisition of LWT, just one of a string of good purchases, seems to be bedding down a great deal better than some had feared. Underlying profits growth at both Granada TV and LWT was a healthy 20 per cent, programme sales were buoyant, and fast-rising ad revenue led to profits more than doubled to pounds 72m.

The leisure division has also benefited from a number of astute purchases. Sutcliffe has taken Granada into the number two spot in catering, ahead of Mr Robinson's former employer Compass, and the recent acquisition of Pavilion brings in eight motorway service areas for a lot less than building on a greenfield site.

But the really impressive performance was in rental, where the hard work in coping with the relentless decline of the industry was somewhat belied by a modest 3 per cent rise in operating profits. Market share is up, the portfolio of shops has been ruthlessly pruned and attention focused on growth areas.

Having stolen a march on rival Thorn, a large chunk of the division's profits actually come from selling second-hand and new equipment. DVR's low-cost direct rental operation is still growing fast, while pushing mobile phones and satellite viewing subscriptions through the rental shops is also working well.

Granada's biggest problem, an enviable one, is just how to spend its impressive cash flow - which if unused would wipe out debts within a couple of years. Add to that the pounds 450m value of the company's stake in BSkyB and Granada has formidable firepower.

On the basis of NatWest's forecast of pounds 340m pre-tax profits and earnings of 37p, the shares now stand on a prospective p/e of 16. After rising four-fold in four years, the shares are no longer cheap. But, with earnings growth in the mid-teens for the foreseeable future, they deserve the premium.

Torrid times for

Henderson

Fund managers have had a mixed time of it over the past year or so. The takeovers of Jupiter Tyndall and Mercury Asset Management's parent, Warburg, have focused the market's attention on the princely sums still available for the better players. But the torrid fortunes of Henderson Administration are a timely reminder that profits remain hard to come by.

Yesterday's results, showing pre-tax profits down from pounds 20.3m to pounds 18.1m in the year to March, should have come as no surprise after February's profits warning, but the shares still slipped 46p to pounds 10.65. The problem of last year's falls in world stock markets has been compounded in Henderson's case by a reputation for poor performance.

The group has failed to attract significant new pension fund clients over the past five years and in 1994 faced a stampede from many who had remained. In all, pounds 1.6bn of UK funds walked out the door and the managers of a further pounds 566m have intimated their intention to follow suit.

With the drop in markets lopping a further pounds 500m from funds under management, Henderson did well to contain the overall reduction to pounds 12.9bn in March from pounds 13.6bn the year before. In fact, leaving pension funds on one side, there was growth of pounds 1.4bn in the other areas of retail, international and administration for third parties.

Dugald Eadie, the new managing director brought in from pension fund performance specialist WM earlier this year to shake things up, was yesterday highlighting the growth in these other businesses. Despite the fall-off in pension fund income, total revenues still grew from pounds 65.3m to pounds 67.8m last year.

Ironically, given his former interests, Mr Eadie thinks Henderson's problems are not simply performance-related and he is focusing on selling the company's successful specialist investment talents to pension funds. Targeted funds have helped build what he claims is the largest unit and investment trust group under one roof.

Investment trusts, valued at pounds 985m in 1991, have grown to a level where, at pounds 3.61bn, they rival the pension fund business in size and Henderson's franchise clearly remains a valuable asset.

Despite the fact that over a fifth of the equity remains locked up with funds managed by the group, now would be an opportune moment for a bidder to pounce.

But the shares, still close to last year's high of pounds 11.73, are discounting a full take-out price at 19 times forecast earnings, assuming profits fall to pounds 17m this year.

Not much new at the Daily Mail

Yesterday's half-year results from Daily Mail and General Trust were hardly worth holding the front page for. As at all its rivals on what used to be Fleet Street, the big issue, together with just how long the insane cover price war continues, remains the sharply rising cost of newsprint.

Investors should not underestimate the damage being inflicted on newspapers by rising print costs, which are counteracting any gains made in pulling in more advertising, increasing the amount that can be charged for ads and reversing circulation falls.

Higher newsprint costs largely restricted the company's rise in taxable profits before exceptionals to just 0.5 per cent to pounds 37.1m in the six months to 2 April.

Most of the woe from higher raw material costs occurred in the second quarter and it would be safe to say that more damage has been inflicted since then. This has added to the costs of launching the higher pagination, pullout financial section of the Mail on Sunday and the relaunch of YOU Magazine.

Costs will have to be cut if the newsprint situation deteriorates any further. But how, and where, is a big dilemma. Reducing the journalist headcount could affect quality, while reducing pagination across the titles could mean forgoing advertising revenues just as that market is improving.

The simple and obvious solution is to raise cover prices on the company's flagship titles of the Daily Mail, the Mail on Sunday and the Evening Standard. Taking the plunge, however, is not so easy since the company's titles already sell at a premium to the broadsheets that are locked in a no-holds-barred price war.

All of these influences have been in the market for some time but the shares none the less took a dim view of the figures, with the ordinary shares falling 55p to pounds 13.73 and the "A" shares dropping 50p to pounds 11.58. In the absence of lower pulp prices and a truce in the price war, they remain unattractive.

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