Imperial emerges in good shape

The Investment Column
Click to follow
The Independent Online
The return of the Imperial name to the stock market today after a 10-year absence has been marked by something less than fanfare. News of the separate listing of Imperial and its three Hanson stablemates has done nothing for the shares of its erstwhile parent, which have slumped 26 per cent since the four-way demerger was announced in January.

Today's first day's trading has been marred by Friday's announcement that 40 former smokers are suing Imperial Tobacco, claiming it failed to warn sufficiently about the links between smoking and cancer. Up to now, the UK's second-biggest cigarette group has got off lightly in the US litigation scares.

That said, for the politically incorrect investor, Imperial has plenty to recommend it. Despite claims that Hanson bought companies as an asset- stripping exercise, Imperial is in fine shape after 10 years within the conglomerate's sausage machine. Capital expenditure has run at over 150 per cent of depreciation in the past five years and the group is regarded as one of the most efficient cigarette producers in the world, with operating margins approaching 50 per cent. A further pounds 35m three-year investment programme in ultra high speed manufacturing and packing equipment is half completed.

Admittedly, the demands of investment have not been particularly onerous for a group whose already prodigious profits are almost entirely converted to cash. In 1995, for instance, despite paying out pounds 25m on capital investment and tax, the group generated cash of pounds 346m out of operating profits of pounds 348m. In future, the group will face a rapidly escalating tax charge and will labour under pounds 1.06bn of debt loaded on as part of the demerger terms. That will take some time to clear, but pro forma interest cover for 1994-95 remains a comfortable 4.7 times.

Investors may find more reasons to fret in the over-ripe state of the UK tobacco market, into which 90 per cent of Imperial's sales are made. Cigarette consumption has been sliding gently at 2 per cent a year over the past four years under the impact of the Government's duty increases. In cigars and handrolling tobacco the slump is running at 6 and 10 per cent a year.

But having been knocked off its perch at the top of the UK market by Gallaher, it has recovered strongly since 1990, bouncing back from a share of under a third to 38 per cent now, within two points of the leader. The key to future success lies in breaking into Europe and developing markets overseas, particularly the Far East, where BAT has blazed the trail.

On an opening share price of around 375p, Imperial stands on a forward multiple of under 9, based on BZW's forecast profits of pounds 335m for the current year. With a forecast yield of 7.3 per cent, they are worth holding.

Chez Gerard is beefed up

It's been quite a year for Groupe Chez Gerard - a flurry of acquisitions that have more than doubled the size of the company and demanded a massive refurbishment programme, the return of bombs to its central London heartland and a collapse in the public's confidence in beef, one of the unashamedly carnivorous group's staples.

To have increased profits by 23 per cent to pounds 2.86m and earnings per share by 28 per cent to 10.8p in those circumstances is an impressive performance. Shareholders were rewarded by a 17 per cent jump in the dividend to 2.8p and a 6p rise in the share price to 242.5p.

Chez Gerard appears to have pulled off that most difficult of tricks, bringing the economies and efficiencies of a chain to a group of individualistic and (reasonably) upmarket restaurants. The plan is to double again in the next three years, as they have in the three since flotation, while retaining the restaurants' character.

The investment case for Groupe Chez Gerard hangs on three main variables. Will the economic background remain favourable, will the trend towards eating out continue and does the company have the resources, financial and management, to benefit fully?

There would appear to be plenty of evidence of rising consumer confidence, at least in the short term, and figures from the Henley Centre suggest a social sea change is occurring that will see us spend a much larger proportion of our disposable income on eating out than we have before. We still lag way behind France and the US.

As for management, the appointment of a new, full-time finance director is a sensible step forward, as is that of a new general manager for the Chez Gerard brand. With only nine restaurants, all within London, this is still a manageable company - even twice as big, it would not stretch the current team too thinly.

On the basis of forecast profits of pounds 3.4m this year and pounds 4.1m next time, the shares stand on a prospective price/earnings ratio of 19, falling to 15. Compared to other companies in the sector, and measured against a growth rate of more than 20 per cent a year, that is not too demanding and the shares remain good value.

Oasis shares are proving fertile

Oasis Stores has been a storming investment since floating last year. Placed at 148p in June, the women's fashion chain's shares have comfortably doubled, even after yesterday's 13.5p dip to 392.5p. The group appears to have overcome its legal difficulties with former owners Graham and Edwina Brown and is thriving on an increasingly successful trading formula.

Pre-tax profits came close to doubling in the 26 weeks to July, rising from pounds 2.61m to pounds 5.19m in the period, with earnings per share up a third to 6.47p from a pro forma figure of 4.86p.

The figures were driven by new shops and healthy like-for-like sales growth of 10 per cent. Over the year to July, the group had opened 22 more stores, including concessions, raising the total to 92, with a further eight added since the period end. But even with most of those outlets being in the UK, Oasis believes there are still at least 50 suitable sites where the group is not represented in the domestic market. Overseas, it has just begun to scratch the surface in Germany and in the Gulf.

But all of this frenetic activity would hardly be justified without a strong underlying market, and it would appear that, so far, Oasis has hit the mark. The underlying 10 per cent growth has continued into the first eight weeks of the new year and brokers are looking for profits to jump from pounds 9.87m to pounds 14.3m in the full year. That puts the shares on a heady p/e of 22.

The market may be right to be cautious. The company is looking at diversifying its distribution and is talking to potential partners about the Internet and mail order. But that will not be enough if the notoriously fickle youth market at which Oasis aims is suddenly turned off its designs. Just conceivably, Sears may be tempted to bid, given its ownership of the Warehouse chain, a former vehicle of the Bennett brothers who now run Oasis, but the shares are high enough.

Comments