Hays promises to deliver : SHARES : BLUE CHIP

Strong results should allay City fears about the transport group's move into eastern Europe
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The Independent Online
HAYS, the lorries-to-personnel group headed by the effervescent Ronnie Frost, is one of the few British companies that is looking to expand into eastern Europe before it has finished covering the western half of the continent.

Most expansionary businesses have toyed with the newly liberated, former Communist markets - and then shied away on account of the currency problems, creaking bureaucracy and sheer poverty.

"But we're like the advance army," Mr Frost says. "We're intending to transport goods for the likes of Coca-Cola and other American groups that have no other reliable way of distributing their products around the area."

It is a neat reversal of the normal tactical priorities. And it has been made possible by the ability to deal in hard currency with western customers who need their hands held by as many friendly partners as possible. The big accountants and hoteliers have been following the same trail of helping western companies that need familliar western suppliers - but they are already firmly established in western Europe.

The share price of Hays has wobbled for the past year as the City has taken fright that it will hit similar problems in continental Europe as Christian Salvesen and NFC. But Mr Frost insists that Hays is doing things differently.

"We are taking our time," he points out, "and we have made friendly takeovers in which the previous owners are on an earn-out." This means that the price they receive for their businesses is tied to profits in the first few years under Hays' ownership.

In addition, and unlike some of its rivals, Hays puts a local national in charge in each country - with a British finance director who speaks the language and is familiar with local accounting practices.

"He is a bit of a `spy in the cab'," Mr Frost admits, "but that's unavoidable."

Initial City fears about the group's European plans have been slightly allayed by the early results from Hays Fril, the French operation, which showed a substantial profits increase in the year to June 1994. Hays Mordhorst, Fril's German counterpart, has also bettered expectations.

These trends should continue as continental Europe comes out of recession, and should provide the group with opportunities to expand into the Benelux countries, Spain and northern Italy.

Hays, whose distinctive blue and white lorries pepper Britain's streets and motorways, has three divisions: distribution, commercial and personnel.

Distribution is the heart of the group. The commercial division, which is about half the size of distribution, takes in document and parcel services as well as data storage. It has the potential to become a wider supplier of business support services, as long as the management can steer clear of the pitfalls that brought BET to its knees a few years ago.

Personnel was added to generate cash and give the group a counter-cyclical activity to balance the rest. Hays has gone for the higher-margin end of the employment business, concentrating on specialist operations such as banking and account-ancy jobs.

The success of distribution has been based on a long-term relationship with the supermarket chain, Waitrose. This, in turn, has led to contracts to bring home the bacon for Tesco and J Sainsbury. But, being out in the harsh, publicly quoted arena, these two drive a harder bargain than Waitrose. Mr Frost admits that the latest Tesco contract came within "a quarter of an inch" of not being worthwhile.

That has led Hays to reduce its dependence on supermarket customers. Instead, it is expanding abroad and trying to win more non-food business at home.

"We deliver Bridgestone tyres," Mr Frost says. "If you have a puncture and take your car to a branch of Kwik-Fit, you don't want to wait three days for a replacement. If it's an unusual tyre that they don't have in stock, we can bring a new one by the following morning."

Techniques honed at the demanding behest of the supermarkets enable Hays to offer a smart service to other time-sensitive retailers such as newsagents.

"It's not just a question of running a network of lorries and warehouses," Mr Frost says. "That's the easy bit. Nowadays it's about information technology, just-in-time delivery, computerised stock control and systems that let us bill a customer's customers."

He is setting about taking the commercial and personnel sectors down the same cross-Channel route that distribution has followed. Hays has also dipped toes into the US and Australian markets, but these will not be developed for a few years. "There is too much to do in Europe," Mr Frost declares.

The group is due to announce half-year figures on 8 March, and these should not disappoint analysts' forecasts of £47m pre-tax profits, paving the way for £106m for the year to June.

At 294p, the shares have come back quite a way from their all-time high of 329p, and the earnings multiple is coming down to an undemanding 17. That should rise as the group gets nearer to qualifying for membership of the FT-SE 100 index club. With a market value of £1.1bn, it is only £300m off the current threshold.

Investors who have had their fingers burnt by the mistakes of other transport companies' cross-Channel forays may still want to see more evidence that Hays has got it right before they start the shares motoring again.

There is nothing in the price to allow for the possibility of a takeover bid from Rentokil. Mr Frost reckons the two companies would fit well, but concedes that at more than £2bn Rentokil would be too large a mouthful for Hays to swallow. However, Rentokil - also due to report soon - may feel differently.