Harry helps fill Safeway trolley

Investment Column

Unlike Archie Norman at Asda, who has grabbed the headlines with a series of eye-catching price-cutting deals and promotions, Argyll's chief executive, Colin Smith, prefers a low-profile, softly-softly approach. But it is proving no less effective and over the last couple of years he has been quietly steering the Safeway group from industry laggard to respectable competitor.

Yesterday's figures show that the catch-up process is continuing nicely. Profits for the six months to 14 October were up 5 per cent to pounds 215m. Like-for-like sales at the group's main Safeway chain grew by 7.8 per cent in the period and by a heady 9.6 per cent in the six weeks since. This is almost into Tesco and Asda territory.

Much of this has come from the group's popular "Harry" advertising campaign as well as last month's introduction of its ABC loyalty card, which has signed up 3 million members. Safeway needs a 2 per cent sales uplift for its loyalty card to pay for itself and says it is meeting its targets.

These measures have depressed the gross margin, which was 0.5 per cent lower than last year. But Safeway is following the Tesco and Asda approach, using lower prices and heavy promotion to drive sales. Safeway is also now pledging to match Asda on key fresh produce prices, which will further depress the margin.

The Safeway 2000 initiative, aimed at improving marketing and operating efficiencies, is starting to yield dividends. It has coped with the disruption caused by nearly 5,000 redundancies and re-training as many other staff moved to different jobs. With its edge-of-town "compact store" format, Safeway is coping better with planning restrictions. It will open 17 stores next year and as many again in 1997.

Sales per square foot have improved from pounds 12.86 to pounds 13.84. The company has pledged to reach pounds 15 by 1998, although even this will be behind its main rivals. Elsewhere Safeway is improving its proportion of primary shoppers as opposed to customers who simply use it as a "top-up" shop. However, it still lags behind market leaders Tesco and Sainsbury.

The spend of the family shopper, another Safeway target, has also increased. Safeway now has creches in 27 stores and plans 60-70 over the next three years. The self-scanning trial has been extended to 24 stores.

Analysts are forecasting full-year profits of pounds 403m. With the shares up 7p to 312p yesterday that puts the shares on a forward rating of 13. Argyll's improvements mean the shares have lost their discount to the sector and they now look fairly valued.

Fly in the sugar at Tate & Lyle

The management succession unveiled by Tate & Lyle on Budget day has removed some of the uncertainties surrounding the sugar and sweeteners group. But there are plenty of others for investors to fret over.

The group faces an investigation into alleged price fixing in the US and a farm bill there that could alter the costs of important raw materials such as maize from next October. On top of that, a glut of beet sugar has meant nobody in the world's largest sugar refining market has made much money in the US, Tate included.

These risks go a long way to explaining the shares' 10 per cent underperformance against the market this year, despite a continuing strong trading performance. Yesterday the company announced pre-tax profits up from pounds 274m to pounds 311m in the year to September, an underlying advance of 23 per cent if pounds 25.5m of one-off items are excluded.

But the more fundamental difficulty with Tate is where it goes from here. World demand for sugar, which is still mainly from the developed countries, is growing at a niggardly 2 per cent a year and the market remains highly competitive.

The maturity of the market led Tate to develop sucralose, a sugar substitute that competes with Monsanto's Nutrasweet. But to date it has been excluded from the main US market by a failure to gain approval from the Food and Drug Administration.

The pounds 12.9m write-off on old sucralose plant in these figures appears to draw a line under that experiment, at least for now.

Tate is now pinning its hopes for growth on developing markets, riding on the back of the apparently insatiable demand for products like Coca- Cola in markets currently starved of them. Even so, profits from developing markets are unlikely to represent more than around 10 per cent of the total.

Group profits of pounds 345m this year would put the shares up 10p at 454p on a forward multiple of just 10. Until Tate can show more exciting growth, or less underlying volatility, the shares are likely to stay dull. Hold.

Yorkshire plays down growth

When the history of privatisation is written, the drought of 1995 will go down as one of the key events in the realisation that the water industry should never have been sold off in the first place. Yesterday's half year figures from Yorkshire Water confirmed that view as the company struggled to justify a dividend rise of 10 per cent even as it was still threatening to cut off its customers' supplies on alternate days.

It is strange indeed when a quoted company seeks to minimise its reported profits growth to placate consumers, politicians and the regulator but that is what Yorkshire was doing yesterday. Profits of pounds 99.5m, up 48 per cent were misleading, the company said, as last year's result included a pounds 25m restructuring charge.

A better measure, and a much less contentious figure, was the 10 per cent increase in underlying profits. Earnings per share of 47.1p provided handsome cover for the increased interim dividend payout of 9.1p.

From the investor's point of view, the import of yesterday's announcement was the continuing cost of tankering water from the relatively damp northern part of Yorkshire to the hills and valleys of the west - where reservoirs are still only 20 per cent full compared with the norm for this time of the year of 60 per cent.

The current cost of the operation is running at pounds 3m a week - and with only pounds 4.6m of the accumulated total of pounds 20m taken against first half profits, analysts were busy downgrading their full year forecasts.

Yorkshire's dividend is so well covered, however, and the events of this summer so unusual, that the dividend, forecast at 31.7p for the year to March, and offering a yield of 6.5 per cent at yesterday's close of 612p, is impregnable.

So it should be - with political worries and the threat of a windfall tax in the background a high yield is a reasonable expectation.

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