Light at end of Brixton tunnel

The Investment Column
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The Independent Online
Brixton Estate has been a bit of a laggard in the re-rating of the property sector over the past year or so. Indeed, its shares, down 1p at 216.5p, have never recovered the 270p peak attained in early 1994.

After years under the steady hand of Harry Axton, who retired as chairman in 1993, the company seemed to lose its way.

A pounds 101m rights issue that year was quickly spent, partly on high-yielding secondary office property which subsequently failed to meet expectations, as the subsequent decline in the group's net asset value bears witness.

The company strenuously denies that any blame for the recent performance attaches to Terence Nagle, the erstwhile managing director.

But his early retirement in May at the relatively tender age of 54 after 25 years with Brixton speaks volumes, particularly given the revelation that he took with him a golden handshake of pounds 212,000.

Yesterday's interim figures, showing interim profits up 6.5 per cent at pounds 18.3m in the six months to June, suggest that Brixton's fortunes may now be picking up.

Vacancies by area have been slashed from 7.2 to 4.6 per cent, with the industrial portfolio dropping to an all-time low of 2.1 per cent.

That provides support for Brixton's policy, adopted some three years ago, of concentrating more resources into the industrial and warehouse sectors, which represented half the portfolio at the end of last year.

Of 626,000 sq ft of property let to new tenants this year, 500,000 sq ft have been in these two sectors. The trend in yields has been pointing in the right direction. At Gatwick, where Brixton made two acquisitions for a total of pounds 19.6m in the first half, industrial yields have fallen by at least a percentage point to 9.5 per cent or below over the past year.

Pro forma gearing was around 91 per cent at the half-way stage, a figure that could fall to 84 per cent if pounds 30m of earmarked asset sales go through. That would leave the group with some firepower to train on the industrial sector.

But higher interest and the strong pound will hit Brixton and its industrial clients alike: the group warned yesterday that the currency effect on its Belgian and German assets would shave 2p off its net asset value.

Brixton also has to overcome the legacy of its past. The office vacancy ratio remains stubbornly high at 15 per cent, while it is not clear that the management, led by executive chairman Douglas Garner, another company veteran, will be enough on its own to command the faith of investors.

Clerical Medical - now owned by the Halifax - and Royal Insurance, which together hold 37 per cent of the shares, will be crucial.

In the meantime, despite the lowly premium to NatWest's full-year net asset value forecast of 199p a share, there is better value elsewhere.

Hit rate makes Capita attractive

It used to take a certain local government department 44 days to process a housing application form. Then Capita stepped in. Each form now gets dealt with in two days. Rod Aldridge, chief executive, reckons it would be possible to reduce that to one day. This potential to improve on such gross inefficiency makes Capita one of the most exciting plays in the fast-growing outsourcing sector. The potential is huge.

Although less than 10 per cent of local government services are contracted out at present, growing pressure on Labour to cut costs means the number of contracts in both central and local government services is soaring. Capita already manages two out of the three central government organisations put out to tender so far - the privatised government pensions agency and RAS, an agency to recruit personnel to the civil service, which it won recently.

These central government contracts are highly lucrative - the pension agency deal is worth pounds 72m over seven years to Capita. There are more to come. The group is bidding for two potentially huge MoD contracts. And though the quantity of government work is growing so fast that it is representing an increasing slice of Capita's turnover, now around 70 per cent, the group is also making good progress in other areas, particularly health and the utilities, where efficient billing and people management are natural requirements.

As contracts get longer and more complex, Capita's broad range of skills in people management, software, and building maintenance is becoming increasingly desirable. The group's hit rate - it wins one in every two contracts at the final stage - is evidence of this. Customers also tend to renew. In the six months to June, Capita won pounds 50m in new contracts and contract extensions, driving profits up 54 per cent to pounds 7m.

Credit Lyonnais Laing, the company's broker, is forecasting profits of pounds 17m in the full year and pounds 21m next year. The shares, down 0.5p at 248p, stand on a heady forward p/e of 40. Worth holding all the same.

Fear is the key

at Shandwick

Like most "people businesses", Shandwick International, the public relations group, has always had to cope with the City's deep suspicion of these kind of service companies.

Institutions' chief concern is that key staff can walk out the door at any moment, taking valuable clients with them. The last year at Shandwick rather proves the point.

The shares soared from a low of 44.5p to 62.5p in just a few weeks at the turn of the year after a good set of results.

But they were hit almost immediately by the defection of five senior financial PR staff in the UK who left to set up their own agency.

Those departures, combined with concerns over the strength of sterling and the underperformance of smaller company stocks, forced the shares all the way back down again. They fell another 10 per cent yesterday to 40.25p as brokers downgraded full-year profits forecasts.

The question is whether the sell-off has been overdone. Half-year profits were up 10 per cent to pounds 3.9m, though the increase would have been 20 per cent but for the effect of the strong pound on profits translation.

The staff defection at Shandwick Consultants in the UK resulted in the loss of just three out of the list of 100 clients retained on a continuing basis. Though revenue in Britain was down by 2.5 per cent in the first half, this fall was more than made up for by a near-20 per cent uplift in operating income from the Americas, the largest contributing region.

Panmure Gordon has downgraded current year profits forecast from pounds 10m to pounds 9m due to a slower start in the UK and the cost of setting up a new dedicated team to win global accounts. This puts the shares on a measly forward multiple of 8, falling to 7. Not a company to invest your last few pounds in, perhaps. And always likely to be volatile. But at these levels, the shares are cheap.

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