Investment: Disco fever to make Northern a hot stock

NORTHERN LEISURE'S emergence as the nation's biggest discotheque performer has not impressed the stock market. Yet the group is acquiring a chain of underperforming night clubs which should dramatically improve its prospects.

Nigel Popham at stockbroker Teather & Greenwood sees profits this year doubling to pounds 28m and hitting pounds 41.5m next year. Earnings per share would increase to 12.1p this year and 16p next.

The group's pounds 150m acquisition of 37 night clubs, plus assorted late-night bars, from the struggling Rank leisure group, gives it around 5 per cent of what is still a highly fragmented market. Northern's deal puts it in top position when the ownership structure of the industry is changing. The two other big disco chains, run by Allied Leisure and First Leisure Corporation, are for sale. The Allied clubs have only recently been put on the market; FLC seems to be struggling to unload its chain, probably to management.

So Northern is swallowing Rank when its two main competitors are unlikely to be in top form, an accident of timing which should be highly beneficial to Northern. Rank's operating margins lag well behind Northern's and will no doubt be lifted to its 26 per cent. Benefits will also be achieved from increased purchasing power and reduced administration overheads.

The dancing group's ability to achieve a pounds 150m deal is a sharp illustration of how stock market fortunes change. Not so many years ago the group was on its knees, a candidate for the corporate graveyard. It was formed to buy a chain of pub-restaurants but was gazumped. It turned to a variety of leisure activities before avoiding corporate bankruptcy by concentrating on discos.

Its dancing focus, together with an upbeat management, have allowed it to grow into a pounds 200m company. The shares were about 5p in 1992; last year, when a predator hovered, they touched 300p. They are now 153.5p.

An injection of new management came earlier this year. In what was a reverse takeover and cash-raising exercise rolled into one, Northern acquired Fife, a former engineer which had become a cash shell under the direction of ex-National Express boss Adam Mills. So the takeover provided a cash infusion as well as the talents of Mr Mills and his team, who seem to get along with the experienced Northern dancing management, led by managing director Clive Preston.

Of course, Fife did not produce enough ammunition for the Rank deal. Northern is raising pounds 62.2m through a rights issue and has fixed banking loans of pounds 180m. Even after Rank's bill the group will have enough to spruce up its new clubs as well as continue its search for more venues.

The night-club business is highly competitive. And, of course, fashions change. There is talk that some of the new style all-purposes bars, which progress from morning coffee to theme bar and then to a night-club atmosphere through the day, are taking the edge off discoland.

But I am not introducing Northern into the no pain, no gain portfolio because we already embrace one disco group, Springwood. I feel two night- club chains will represent rather too much investment exposure to dancing. And Springwood has been a winner. The shares have climbed from 131.5p since I tipped them in June to 235.5. My bet is they have further to go.

It would be unwise to ditch such a rewarding performer, even for a group with Northern's undoubted talents.

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