Investment Column: Menzies' measures bearing fruit

John Menzies, like its larger rival WH Smith, has had its share of problems over the past couple of years. Heavily dependent on newspaper wholesaling, it was badly affected by the newspaper publishers' decision to screw down distribution contracts a year ago. That compounded difficulties Menzies already faced as a result of the shake-up in the market following a 1993 Monopolies and Mergers Commission inquiry into the industry. The resulting profits warning in January hit the shares, but figures out yesterday suggest Menzies' attempts to tackle its problems are bearing fruit.

Pre-tax profits down 5.8 per cent to pounds 35.9m in the 53 weeks to 4 May were better than the market was going for and the shares responded with a 19p rise to 574p yesterday. The results reflected a modest pounds 1m recovery in newspaper wholesaling profits in the second half after a pounds 4m slide in the opening six months, which bore most of the cost of radical measures to revitalise the business. A 14 per cent like-for-like sales growth in the second half augurs well for the division.

Initial or first full-year contributions from three operations bought in 1995 helped offset the dip in newspapers, pushing profits from the whole distribution division pounds 1m ahead to pounds 27.2m. But the group's efforts to ginger up its retailing operations were again frustrated last year.

The first year of a three-year plan to rejuvenate the John Menzies newsagents chain saw it chip in something over pounds 2m to these figures, up from break- even before, with sales in refurbished stores showing an 11 per cent underlying rise. But the good work was undone at the Early Learning Centre, the toyshop chain aimed at younger children, where profits dipped over pounds 3m. The 4 per cent sales decline suggests it may be running out of steam in the face of strong competition from the likes of Woolworths and Argos. Outside consultants are taking a wholesale look at the business, but it may struggle as birth rates fall.

Arguably the best news yesterday was the forthcoming management changes, which will see the family loosen its grip at board level at least, although it retains control of over 50 per cent of the shares. David Mackay, who moves up from wholesaling to the chief executive's post, has impressed City observers.

Profits of around pounds 42m would put the shares on an undemanding forward multiple of 12. They are reasonable value on prospects of further recovery, but the market is very tight.