Greenalls gathers a potent portfolio

The Investment Column

Greenalls has not put a foot wrong since the Beer Orders of 1989 convinced it that it made more sense to jump on the retail and leisure bandwagon than continue slugging it out with the likes of Bass and Scottish & Newcastle in a declining, oversupplied brewing market.

The acquisition of Devenish, which had reached the same conclusion itself, was followed a year ago by the pounds 600m purchase of Boddington, another ex- brewer whose well-known beer brand is now part of the Whitbread stable.

Full-year figures yesterday for the 12 months to September confirmed that the deal is bedding in nicely and the promised savings of pounds 18m a year are on track. In the short term the return on that investment might not be as exciting as some of Greenalls' smaller rivals can claim from their developments but as a long-term strategic move the deal made abundant sense.

Boddington was such a sizeable acquisition, even for a giant pub group like Greenalls, that the company chose to report two sets of figures. Excluding the newly acquired pubs, underlying profits rose a steady 11 per cent to pounds 111.3m, earnings per share were 10 per cent better at 38.5p and the full-year dividend rose 9 per cent to 15.4p.

Adding in the pounds 47.1m of operating profit Boddington made in the 11 months since acquisition, reported pre-tax profits emerged at pounds 148.7m, a 48 per cent increase.

Greenalls has established itself as the pre-eminent food and drink retailer outside the big integrated brewing and pub groups. From a small, family- run operation at the end of the 1980s it has flirted with FTSE 100 membership this year, a size which has given it considerable clout within the industry. When current beer supply contracts with Bass and Whitbread run out in a couple of years you can bet Scottish Courage will want a slice of the action and buying terms can only improve.

Elsewhere, the company is becoming a serious contender in the buoyant hotel, fitness and leisure market, it runs a portfolio of more than 1,100 tenanted pubs and is one of the country's biggest drinks wholesalers. It is an enviable portfolio.

The disadvantage of Greenalls' size is that it is finding it difficult to grow at anything other than a solid, respectable rate. Forecasts for the current year of pounds 166.5m pre-tax profits and pounds 181m next time mean earnings per share are growing at rather less than 10 per cent a year. In the middle of a strong consumer recovery, that is hardly breathtaking progress and the current market rating is as good as can be expected in the short run. The shares, which closed 10.5p lower at 591.5p, are worth holding, but only on a longer-term view.

DMGT invests

for profits

The owners of the struggling Express Newspapers might learn a lesson or two from the record of the mighty Mail, part of the media empire owned by Daily Mail & General Trust. To make money, you have to invest money.

That maxim appears to be behind DMGT's excellent results in the year to 29 September, when pre-tax profits climbed a healthy 28 per cent to pounds 85.5m, on revenues ahead to pounds 1bn, a rise of 15 per cent.

The crown jewels are the Daily Mail and the Mail on Sunday. Both enjoyed circulation gains, with the daily ahead year-on-year by 13 per cent and the Sunday up 5 per cent. Regional newspapers, grouped under the Northcliffe subsidiary, also performed strongly, posting their highest profit.

The group has not been shy about investing for the future, and shareholders have had to put up with quite pedestrian operating margins as a result. This past year, the margin has been about 7 per cent, which will probably increase to about 10 per cent in 1997 well short of the traditional 15 per cent enjoyed by successful newspapers.

It hardly matters at this stage, given the excellent growth in profits and the aggressive dividend policy that has been in place since 1989. But newspapers are not the whole story. DMGT has made calculated, if contained, investments in a range of media: Cable (Channel One), radio (in Sweden and Australia), electronic publishing and Internet sites. The acquisition and investment strategy appears to be well-rooted in sound principles.

In the medium term, DMGT's prospects look impressive, as it begins to reap the rewards of its aggressive investment policy. Moderating prices for newsprint, down by some 12 per cent since the middle of the year, will either drop straight to the bottom line or be used to enhance the titles yet further.

In time, DMGT will probably reward its shareholders with improving margins, which suggest an even rosier outlook for pre-tax profits. Combined with a relatively light tax rate (thanks to capital allowances), the effect will be to highlight the degree to which the shares are now undervalued.

Expected pre-tax profits of about pounds 120m in the year to September1997 (79.5p a share), rising to pounds 145m in 1998 (96p) put the shares on a forward multiple of just 15. Good value.

All go at

Wainhomes

It has been an eventful year at Wainhomes, the regional housebuilder whose shares were floated at 170p two years ago. The northern subsidiary became embroiled in a pounds 2m fraud inquiry which saw chief executive Ronald Smith sacked after losing the board's confidence in his ability to lead the company.

Mr Smith, who was not involved in the fraud inquiry, is claiming pounds 450,000 for wrongful dismissal and an agreement is expected to be settled with him in the next month. Wainhomes is also pursuing a civil action against contractors. While all this was going on rival housebuilder Bellway took advantage of Wainhomes' weakened share price to pick up a 4.8 per cent stake at 75p-80p a share, against last night's closing price of 103.5p, up 3p.

Unearthing the irregularities prompted Wainhomes to reshape its business, the full benefits of which have yet to come through. In the six months to September, group pre-tax profits fell to pounds 1.75m from pounds 4.25m a year ago on sales of pounds 45.1m (pounds 48.2m). The 1.5p dividend was maintained, covered by earnings of 1.9p (4.5p).

But dependence on the sluggish north-west of England market was reduced from 57 to 50 per cent after Wainhomes paid pounds 24.5m for 2,045 plots in southern England. The average house price rose to pounds 82,582 from pounds 76,123, reflecting larger units sold.

The number of houses sold dropped to 546 (633) as Wainhomes deliberately scaled down its marketing efforts, but reservations in the first 10 weeks since 30 September are "substantially higher" than in the same period last year.

NatWest raised its full-year forecast by pounds 200,000 to pounds 6.5m, implying a price/earnings ratio of 15. Cheap if Bill Ainscough, the new chief executive, delivers on his promise to get return on capital up from 4.4 per cent to 10 per cent within 18 months just by managing the business better.

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