Halifax in same league as Lloyds;The Investment Column
Friday 22 August 1997
The statistics surrounding the flotation of Halifax make impressive reading. It was the biggest expansion of share ownership, 50 million letters were mailed out during the conversion process, and it has the largest single-company PEP with 283,000 customers.
Against that backdrop, a 9 per cent rise in first-half profits to pounds 802m and no interim dividend might be seen as a bit of an anti-climax.
As Jon Foulds, the chairman, points out however, the first half was a truly exceptional period and the headline figures are a bit of an irrelevance. Not only did the period include the conversion and flotation, it also closely followed the acquisition of Clerical & Medical, the first of probably several attempts to diversify away from Halifax's traditional building society borrowing and lending business.
For the record, earnings per share rose 8.2 per cent to 21.2p and total assets increased by 6.8 per cent to pounds 123bn. The shares, which have done precious little since flotation in June, closed 8.5p lower at 727.5p.
The small print makes interesting reading, though, especially the details of Halifax's return on equity. On the face of it, the new bank made 14.6 per cent on its capital in the first half; strip out the pounds 3.5bn of surplus capital looking for a home and the underlying return was a more exciting 27 per cent.
That puts Halifax in the same league as Lloyds TSB, its most obvious rival, but still way shy of the 40 per cent that bank achieved in the first six months of the year. Halifax's aim of becoming Britain's leading supplier of personal financial services will hinge on how well it spends its idle capital and whether it can narrow the gap with the industry's benchmark company.
Mike Blackburn, its chief executive, spelled out a 10-year plan to bring its non-mortgage and savings business up to 50 per cent of the total. As it contributes only 25 per cent currently, that will involve some large acquisitions by its life assurance, pensions and general insurance businesses. Unfortunately it's hard to hide a pounds 3.5bn war chest and everyone has seen Halifax coming, driving prices in the sector sky-high.
The other restraint on the share price will be a sense of wait and see about the management ability of its senior executives, which was apparently justified by a spate of lax lending last year in the unsecured loans book.
That said, long-term investors can hardly go wrong with Halifax. It is a leading player, with an enormously strong brand name, in a fast-growing industry and it has the balance sheet strength to take advantage of the sector's consolidation.
On the basis of forecast pre-tax profits of pounds 1.62bn for the full year, the shares currently trade on a prospective price/earnings ratio of 17. One to tuck away and forget.
A profit warning worth re-reading
On the surface, Quarto's profits warning yesterday looks forgivable - yet another sad case of currency-itis. With more than 80 per cent of the book publisher's revenues in non-sterling currencies, the rising US dollar against the German mark and strength of sterling knocked around pounds 400,000 from interim profits and will affect full-year numbers.
And even yesterday's profits crash - pounds 1.6m to pounds 500,000 in the six months to June - was, in itself, less alarming than it appeared. Of the 3 per cent decline in margin, around half was blamed on currency, and the rest to higher sales and marketing costs and unfortunate timing which resulted in fewer new titles in the period. In any case, Quarto makes the bulk of its profits in the last quarter of the year.
But a closer look suggests there are more fundamental problems. Even excluding yesterday's 28.5p fall to 155p, Quarto's shares have underperformed the market by 58 per cent over the past year.
Quarto makes its money by producing and selling books to publishers, pre-selling at fixed prices. While Quarto makes tiny margins on the first round of publishing - print and production costs wipe out profit - where it has done well is the reprint market - half the group's revenues.
Reprints are cheap to produce and if Quarto can raise the original cover price, it can make a decent margin, typically 30 per cent gross.
The trick, though, is getting new book titles on to the shelves in the first place. In the US, over half of Quarto's total market, that has been the problem. There, the most important outlet for Quarto's books - how to paint, how to cook and gardening glossies - are discount book retailers. Fierce competition in that market has meant an oversupply of titles, with many being returned to publishers.
On the Continent prices of books in depressed economies such as France and Germany have slumped, squeezing Quarto's margins. Add the pressure of currency, which has made books 30 per cent more expensive, and things look tough for Quarto. On top, some of Quarto's big hope titles, like its children's fiction series, have bombed.
Tim Steer at house broker Merrill Lynch has sharply downgraded full-year forecasts from pounds 7.8m to pounds 5.5m. Though the shares are on a forward p/e ratio of 9 times, don't touch.
Maid's grandiose plan may pay off
Since floating his online information company three years ago, Dan Wagner, the colourful chief executive of Maid, has given investors a roller-coaster ride.
Unfortunately, the spills have far outweighed the thrills along the way. Shares in Maid have underperformed the stock market by 36 per cent over the past 12 months. In February, Mr Wagner was forced to issue a reassuring statement to try to arrest the decline in the company's share price.
Press speculation forced Maid into releasing a statement of an altogether different sort yesterday - that it is in discussions about a bid for Knight- Ridder Information, an online information provider.
The news is in keeping with Mr Wagner's partiality for the grandiose. Part of the US newspaper publishing giant Knight-Ridder, KR Information is four times the size of Maid in sales terms, reporting revenues of $285m last year.
So would this be a good deal? Maid could stretch to a price tag of between pounds 250m and pounds 350m, around 1.5 to two times sales. Mr Wagner is keen to reassure shareholders that he will not overpay, but the company will probably have to pay for the deal with a combination of debt and shares.
If it comes off though, the acquisition could improve Maid's prospects. KR Information would give the company access to a large amount of content, which at the moment it has to buy in at a high price. There are also substantial synergies between the two businesses, and acquiring KR Information would give Maid a greater global presence than it has achieved alone.
Though the market was jittery about the size of this potential deal, marking Maid's shares 2p lower to 235p, analysts are already muttering about upgrading profit forecasts.
House broker ABN Amro Hoare Govett puts the company on a p/e multiple of 14.4 times for 1998. That compares with around 26 times for the media sector generally. If this deal comes off and the price is right, investors could see Maid's rating improve. A buy for the brave.
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