Ladbroke is worth betting on

The Investment Column

Ladbroke's historic co-operation deal with Hilton Hotels Corporation of the US drew most of the limelight yesterday, but the leisure and hotels group also had a good story to tell about trading so far this year. Half- year figures were far better than the City was expecting, prompting analysts to raise their 1996 forecasts and dealers to push the shares 3.5p higher at 209.5p.

But the 29 per cent rise in pre-tax profits in the six months to June was more than just impressive. It could embarrass the group now led by chief executive Peter George. Since the onset of the National Lottery in 1994, Ladbroke and the rest of the gaming industry have complained about itsimpact on their betting businesses and have lobbied the Government for concessions to level the playing field.

In particular, instant-win scratchcards were held up as the great Satan that threatened the ruin of thousands of betting shops, where Ladbroke is the biggest operator, and the decimation of the pools industry.

The initial effect of the lottery was dramatic. Betting turnover, especially on horses, fell off a cliff, thousands lost their jobs as the industry cut costs to compete, and Ladbroke's shares crashed to a low of 123p. But given the 17 per cent rise in profits to pounds 43.6m in the betting and gaming division in the latest six months, the novelty of scratchcards has clearly worn off.

Several other factors have also worked in Ladbroke's favour. Although retail betting turnover fell pounds 15m to pounds 885m, profits advanced, thanks to the 1 percentage point reduction in betting duty to 9 per cent, lower overhead costs and the introduction of betting on the Irish lottery.

The Euro '96 football championships also helped, bringing in about pounds 5m of extra profits. Hotels gained about pounds 2m from visiting football fans, while a series of draws and England's defeat at the hands of Germany in the semi-final netted Ladbroke another pounds 3m on the betting side.

All this means Ladbroke has slightly less ammunition to shoot with as it continues campaigning for more concessions from Whitehall, including allowing betting on the UK lottery.

Nevertheless, Ladbroke has turned the corner. Net debt continues to fall as the property portfolio is unwound and now stands at less than half of shareholders' funds. The hotels market around the world remains buoyant, especially in the UK. And the potential benefits of unifying the Hilton brand name add plenty of spice.

Only the decision to hold the dividend suggests Ladbroke is treading warily. Kleinwort Benson's top of the range forecasts look for pre-tax profits of pounds 170m rising to pounds 215m the next year, implying a p/e ratio of 20 falling to 15. Good value.

Reckitt defies the City sceptics

Reckitt & Colman, the disinfectant to cough cures group, was in chipper mood yesterday. In defiance of City sceptics who wondered at the logic behind the ambitious global strategy being pursued by chief executive Vernon Sanky, the integration of last year's pounds 1bn acquisition of L&F Household, maker of America's leading disinfectant, is proceeding ahead of plan.

The promised pounds 400m disposal target over three years has been beaten in under two, with the recent sale of Brazilian pigments and the German Schulke & Mayr hospital disinfectants operation taking total proceeds to pounds 432m. On top of that, cost savings of pounds 40m in the US this year are on target, even if reaping the full pounds 25m savings from Reckitt's existing European businesses appears to have been delayed until 1998.

Figures for the half-year to 29 June, unveiled yesterday, carried few surprises, but the improved sentiment helped drive the shares 3p higher to 684.5p. Headline pre-tax profits slumped from pounds 316m to pounds 179m, but the figures were distorted by disposals, mainly last year's pounds 167m profit on the sale of Colman's mustard and Robinsons soft drinks brands. Stripping out the funnies, underlying profits rose 10 per cent to pounds 165m.

Reckitt has made progress raising margins, which have risen from 15.8 to 16.5 per cent at the operating level, and there should be more to come. The combined US business is operating with the same number of people as the group had before the acquisition. Synergy benefits are running at pounds 31m, and the forecast pounds 40m should be easily beaten.

But Reckitt still has its work cut out to convince doubters who point to the sluggish top-line growth, with sales up from pounds 1.11bn to pounds 1.16bn representing underlying growth of 5 per cent. The European market for household products remains intensely competitive, with prescription pharmaceuticals the only bright spot. Meanwhile, underlying sales growth of 7 per cent in North America was not as good as it looked, given the destocking there last year.

Once the restructuring benefits run out next year, Reckitt will need to prove it can deliver real underlying growth outside Asia. Full-year profits of pounds 318m would put the shares on a forward multiple of 14. Fairly rated.

T&N cloud has a silver lining

T&N was in the dogbox again yesterday, but for once it was not just the cloud of asbestos liabilities which overhangs the pistons to brake linings group that caused the anxiety for investors. The market had been expecting bad news as the old Turner & Newall struggled to cope with sluggish automotive sales in the US and destocking among its customers.

Even so, profits before tax, cut from pounds 73.2m to pounds 58.1m in the six months to June, were below expectations. Analysts were wrongfooted by a pounds 6m- pounds 7m hit for destocking plus a charge for redundancies that roughly doubled to pounds 8.1m in the half-year. Full-year forecasts tumbled yesterday as a result, with UBS knocking pounds 20m off to leave its at pounds 110m. The shares dropped 8.5p to 135p.

But to be fair, the latest costs should represent an investment for the future. T&N has been working to reduce its gearing, which was 78 per cent in June 1995. Disposals have pulled in over pounds 200m in the past 18 months and strenuous efforts by management have squeezed pounds 26m out of stocks in the continuing businesses over the 12 months to June. Together, that has helped cut gearing to a level of 47 per cent.

The trouble is that T&N's stock reduction efforts have come at a bad time, with its customers also cutting their inventories. The resulting fall in throughput has hit factory efficiencies and the comparison is made worse by a period last year when T&N was barely keeping up with demand. Although the short-term outlook for the European market is murky, the US is picking up.

There are also grounds for optimism on asbestos. T&N is suggesting the extra cost if it fails the latest legal challenge could be pounds 50m, a chunky sum, but one which pales against the pounds 350m shelled out over the past 10 years.

On a forward p/e of 11, it remains a steal for those willing to brave any more asbestos shocks.

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