Greycoat grows more desirable

THE INVESTMENT COLUMN

Peter Thornton, managing director of Greycoat, can afford a rueful smile about the share options he recently waived. At pounds 20 a throw, compared with the current share price of 138p, they were pretty academic.

Other shareholders who have stuck with the property developer since the shares peaked in 1989 at the equivalent of just over pounds 25 will have long since put the investment down to experience.

It was a close-run thing 18 months ago whether the company would survive at all.

One of the highest of the sector's flyers in the late 1980s, Greycoat came a gigantic cropper as property values slumped and its ambitious financing arrangements came to seem ludicrously optimistic. Greycoat was responsible for some of the most eye-catching office developments of recent years, but the way it paid for them was too clever by half.

Unlike Rosehaugh, Stanhope, Speyhawk and many others, however, it pulled through with the help of two rights issues and a complex reconstruction. Greycoat is now free of "funny money" and a highly geared play on the central London property market.

Yesterday's full-year results, showing pre-tax profits of pounds 6.5m, were the first black ink since 1990, and the 0.6p dividend, the first payout for three years. Greycoat is pleased to be a dull company once again.

Four-fifths of the company by value is represented by three buildings, Embankment Place above Charing Cross station, two adjacent office blocks in Victoria and a secondary site on the Strand. Those pay the bills, with rents - above the going rate but safe and from good tenants - of pounds 30m. Out of that comes finance costs of pounds 25m and other overheads of about pounds 3m. Because the buildings are over-rented, however, profits growth is likely to be uninspiring.

The interest in Greycoat, therefore, comes from two areas. First, the prospect that central London property values are set for a substantial increase thanks to an impending shortage of supply and steadily increasing demand. It is a plausible argument, although cynics would say the industry has been spinning the same line for over a year now.

The bigger excitement is the prospect of a bid for Greycoat, now that it is less of a black hole. Net assets at the year-end of 175p a share were at the top end of expectations, and forecasts of perhaps 190p at the end of the current year put the shares at a sizeable discount to the underlying value of the company.

With tax losses worth up to pounds 50m to a bidder and an option over Britannic House, BP's headquarters, possibly chipping in a further small bonus, the shares are looking interesting.

Greenalls' food focus pays off

Greenalls' decision to quit brewing five years ago to concentrate on pubs, branded restaurants and hotels looks ever more prescient. That move, together with the Devenish acquisition in 1993, has helped the shares outperform the market by 5 per cent over the past two years.

Yesterday's figures also looked pleasing, with pre-tax profits for the six months to March up 21 per cent to nearly pounds 40m. In pubs, which account for 75 per cent of Greenalls' profits, the company has been selling back- street boozers to concentrate on outlets aimed at families, where a decent meal is as important as drink.

More than half of Greenalls' managed estate now serves food, and the results speak for themselves. Food sales at Greenall Inns were up by 8.7 per cent on last year and drink sales rose by nearly 8 per cent. Greenalls' Royal Standard pub in West Derby, Liverpool, is a classic example. Two years ago it could not have sold a chip butty. Now it is taking pounds 4,000 in food orders a week.

In hotels Greenalls has been moving out of the middle ground three-star hotels to concentrate on four- and five-star hotels at one end and lodges at the other. One three-star hotel was sold in the first half and another four or five are up for sale. Occupancy at the De Vere hotels group increased by 6 per cent over the year and room rates moved up by a similar amount, with business in the conference sector picking up. The loss-making US hotels business will be sold.

Greenalls' other headache comes from off-licences, where it is caught between the supermarkets and the larger off-licence chains such as Threshers and Victoria Wine. A new management team is in place and the strategy is to concentrate on specialist shops such as its Wine Cellar and Greenalls food store brands. The company says the division will not be sold.

NatWest Markets is forecasting full-year profits of pounds 99m, which puts the shares on a forward rating of 13.2. After a good run so far this year the shares have probably gone far enough, but longer term Greenalls looks to have the formula right.

Schools niche

lucrative for RM

The sad decline of Tadpole should not deter investors from all technology stocks. A case in point is RM, a supplier of computer hardware and software for schools, which floated last December at 175p.

Like the successful Sage, the north-east based supplier of accounting packages, RM has cornered a niche market. It claims to command about half the pounds 70m-pounds 80m spent each year by secondary schools on information technology and a quarter to a third of the pounds 40m primary school market.

This is an area which must surely escape the current squeeze on local authority budgets, given the small sums involved and government boasts about the importance of IT. Certainly, maiden results from RM yesterday showed no-let up in growth. Profits leapt from pounds 155,000 to pounds 1.04m in the six months to March on turnover up from pounds 28.7m to pounds 33.6m. An interim dividend of 1.5p, compares with 1p paid last time.

The figures were boosted by a turnround of pounds 288,000 in the interest bill to receipts of pounds 247,000, mostly as a result of strong cashflow and a conscious decision to correct the seasonality of the business, which normally sees it only break even in the first half. But with a small acquisition already under its belt and two recently launched products (including an Internet service) showing promise for the future, the business looks set fair.

Full-year profits of pounds 4.4m would put the shares, up 7p to 214p yesterday, on a prospective multiple of around 12. Good value, even if the interest of Misys, last year's prospective bidder, may now have waned.