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Cause for concern at Allders

Management at Allders, the department store and duty free retailer, makes much of the seasonal balance between the group's two divisions. In theory, the department stores perform well during the winter, while the duty free outlets have their peak season in the summer, when airport traffic is highest.

That makes yesterday's figures look a little worrying. In the six months to March, group pre-tax profits grew from pounds 11m to pounds 16.5m boosted by a pounds 3.8m Uniform Business Rate refund. The period should have been the department stores' turn in the limelight but profits from the shops fell from pounds 10.4m to pounds 10.1m and the company warned that prospects for the remainder for the year were mixed following a deterioration in consumer demand.

Though like-for-like sales are up by 3.1 per cent over the year, trading has been tough in recent weeks, with like-for-like sales flat since April. Furniture sales have been poor, with Harvey Lipsith, chief executive, blaming the usual suspects, higher interest rates and the continued absence of the feel good factor. It is a familiar tale of woe told by many retailers, including House of Fraser.

Allders is investing heavily to transform itself into one of the country's leading deparment store groups. It invested pounds 15m in store development over the six months, with a re-launch of the Leeds store planned for the summer and a pounds 1m advertising campaign. The group's flagship store in Croydon contributes 25 per cent of department store sales and should start to perform better now building work has finished.

Elsewhere, Allders at Home, the edge-of-town format, is contributing 10 per cent of department store sales but the company declines to reveal its profits contribution.

Internationally, Allders has been expanding its duty free business and now has outlets on the QE2 (completed on time, unlike the ship's recent refurbishment) and on P&O's new cruise liner, Oriana. The division contributed profits of pounds 3.5m in the last six months compared to pounds 1.9m, which looks impressive, but the division's problems lie further out.

The threat by the European Commission to end duty free shopping within Europe in 1999 would hit Allders hard. The company admits that tobacco and standard drinks like gin and whisky would be affected but says perfumes, cosmetics and more unusual tipples would still perform well. The company has been expanding outside Europe to insure itself against the worst, hence the purchase of the Regency duty free business in New Zealand.

Allders shares slipped 16p to 221p on yesterdays' results and may now be set for a slowdown after a good run so far this year. Morgan Stanley is forecasting full-year profits of pounds 27m and earnings of 17.3p. That puts the shares on a forward rating of 12.7. Not demanding, but high enough given worries over the European duty issue.

The outlook is bright for Frost

Frost Group, the country's biggest independent petrol retailer, has more than delivered the goods since being re-floated out of the rubble of Norfolk House in 1991. Earnings per share growth has comfortably topped 20 per cent a year since then.

That is impressive enough, but to net a serious profit of perhaps pounds 12m, James Frost, chairman and chief executive, needs to maintain that pace for another two years. Whatever you think of share option schemes, this one ensures his interests coincide with other shareholders'.

That incentive provides a powerful explanation for Frost's rapid expansion, which stepped up a gear yesterday with the acquisition of Burmah Castrol's chain of petrol stations and franchise operations for pounds 83m. Despite the accompanying financing, which involves a one-for-three rights issue at 213p to raise pounds 46.7m, the market reacted favourably to the news, marking the shares up 5p to 270p.

The deal will raise the number of outlets for Frost's Save brand to around 1,250 from 236, boosting the group from 16th to fifth place. Accounting for over 4.5 per cent of UK petrol sales, the company will gain substantial purchasing clout. But the potential of the deal is far greater.

Burmah brings 182 company-owned or leased sites, of which 162 are operational, supplying an average of 445,000 gallons per outlet a year. Mr Frost sees plenty of scope to raise that closer to the company's own average of 628,000.

Another 807 owner-operated sites are supplied by Burmah's wholesale side. Weeding out the underperformers and putting the remainder on more favourable terms should stimulate higher sales in that part of the portfolio, while there are substantial head office costs to strip out.

Burmah's 170 staff, at a cost of pounds 6m a year, compare with Frost's 55 and service a smaller company-owned network. Frost is pencilling in pounds 4m of exceptional reorganisation costs.

Profits have been lumpy at the Burmah business, slipping from pounds 10.3m to pounds 8m last year, but Frost has proved before it can turn round acquisitions from the same stable. Gearing at a pro forma 51 per cent will not be demanding after the deal, which should be earnings-enhancing. The outlook is bright but, even if pre-tax profits top pounds 15m this year, the shares at an ex-rights price of 257p stand on a forward multiple of 18. High enough.

Regalian awaits Heathrow link

The most striking aspect of Regalian's latest figures was not the fall in profits, which the market expected, but the yawning gap between the property developer's net assets of 40.3p and the share price of 20.5p, down 0.5p yesterday.

Put simply, the market does not believe the company's valuation of a site it owns in Paddington, empty as yet but with planning permission for 1.5 million square feet of mainly offices. It is in the books for about 20p a share.

David Goldstone, Regalian's famously socialist chairman, is always enthusiastic about the site's potential - it will be 17 minutes from Heathrow when the fast-link is finished in 1997 - but he seems more bullish than normal, suggesting that some sort of deal may be in the pipeline.

If he can pull something off, the shares, which have drifted for the past 18 months or so, might have some interest. If not there is little in current trading to suggest they will go anywhere.

Pre-tax profits in the year to March fell from pounds 2.75m to pounds 1.38m after a slump in sales from pounds 63.0m to pounds 18.4m. Having scraped through the recession by selling off all its stock at whatever price it could manage, the company is in limbo, building up development sites but having to wait for profits to flow again.

Not that there is any shortage of interest in those developments, which include the redevelopment of an office block on the Albert Embankment into luxury flats, the refurbishment of a terrace in Regents Park, warehouse conversions and Docklands developments.

Mr Goldstone's infectious enthusiasm received some concrete support from the announcement yesterday that Regalian is planning a capital reconstruction so that it can resume dividend payments for the first time in three years.

Shareholders who have stuck with Regalian through thick and thin will realise that more than the usual amount of circumspection is required with its shares. But if you believe in the benefits of the Heathrow link to Paddington, they are an interesting asset play.

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