Regulation wild card likely to keep the lid on BT performance

THE INVESTMENT COLUMN

With the shenanigans at British Gas focusing attention on the credibility of the privatisation process, and chairman Richard Giordano's comments all but suggesting that private investors were no longer welcome, all eyes were on British Telecom's third-quarter figures yesterday to see if Sir Peter Bonfield, the new chief executive, could ease the Government's discomfort.

It was a pretty good performance in the circumstances and the telecoms giant's shares rose 2 per cent to 361.5p as the City warmed to better- than-expected nine-month figures. Most of the improvement in pre-tax profits from pounds 2.15bn to pounds 2.44bn came from a reduction in redundancy cheques, but the headline figure was still comfortably higher than forecast.

Even after the rise, however, the share price is still almost 60p, or 15 per cent, below the price at which the Government sold the third tranche of BT shares. Over the past five years, BT's shares have underperformed the rest of the market by a substantial 29 per cent. In the past year they have lagged the FT-All Share index by 25 per cent. For a company supposedly operating in one of the biggest growth markets of the decade, it has been a pathetic performance.

The numbers involved are much bigger, but the principles determining BT's attractions as an investment are the same as for any business - the extent to which it can grow sales, how well it can contain costs and how quickly it can grow its dividend. With BT, all of these are determined in part by an added wild card - regulation.

As for sales, the outlook does not look brilliant. For the remainder of the current price-cap regime (until July 1997), there seems little reason to suppose that BT can reverse the trend of the past few years, which have seen volume growth eaten away by enforced price cuts.

With only muted economic growth and the boost to BT's competitors from the prospect of number portability, the sales line will be more than ever dependent on mobile phones and international alliances. Historically, BT has made up for slow sales growth with draconian cost-cutting. Since 1990, for example, the head count has declined from 246,000 to less than 240,000.

But with the current redundancy programme due to finish in September, the 30 per cent inflation-adjusted decrease in staff costs during the 1990s is bound to run out of steam.

Elsewhere, the move towards entertainment services down phone lines and BT's global aspirations mean capital expenditure is bound to increase.

The final element determining the dividend - regulation - looks as uncertain as ever. With Oftel seemingly intent on imposing tough new anti-competitive licence conditions on the company and most analysts thinking the RPI- 7.5 per cent price cap is likely to be maintained or even tightened, the chance of BT being able to keep its dividend growing in real terms is slim.

With a yield of over 6 per cent, some of that is factored into the share price, but not by any means all of it. Expensive.

Testing time for Westminster

Growth at Westminster Health Care, the UK's second-largest nursing home group, has been meteoric in the last four years, but the shares have drifted back from last year's high of 356p. Sentiment has been affected by the Government's Community Care Act, which transferred funding for old people to local authorities, and by last year's problems in getting a pounds 33.7m rights issue away.

The growth story continued yesterday, with the group announcing a 28 per cent rise in pre-tax profits to pounds 8.01m for the six months to November. But after years of improvement the industry is clearly facing new pressures. A cap has been put on government funding, which even at the more upmarket Westminster represents more than half its total fees, at a time when it is becoming more difficult to maintain occupancy levels.

The mood among social services departments is to keep people at home longer, while hospitals are keener to discharge patients earlier.

The net result is that the average stay in a home is getting shorter: in Westminster's case, from 24 months two years ago to just 20 months now. These trends may reverse. More important from the company's point of view is the increasing over-capacity that is becoming evident.

It forecasts that 3,000 to 4,000 of the 17,000 homes operating in the UK could go out of business over the next two to three years.

Westminster is well placed to capitalise on these trends. Better buying and other efficiencies have helped to maintain gross margins around 31 per cent in the half-year. Gearing at 37 per cent should allow acquisitions.

But margins are likely to be lower in businesses being developed, such as an emergency helpline for the elderly, while the 42 per cent stake held by Tenet, a US healthcare giant, may not be sold to a bidder as some optimistic investors hope. Full-year profits of pounds 18.2m suggest that the shares, up 1p at 334p, are looking overvalued compared with rivals Takare on a forward multiple of 14.

Amstrad looks set for recovery here yes

Yesterday's half-year results from Amstrad, showing a plunge from a measly pounds 25,000 profit to a pounds 5.4m taxable loss, looked worrying, but they should be seen as a minor hiccup in the company's attempts to overcome the problems of the past few years.

Mr Sugar, who is as thrifty as they come, does not boost the interim dividend by 25 per cent to 1.25p without good reason - and certainly not to appease his many critics in the City. He plainly believes Amstrad is back on track and, if one of the newer subsidiaries, mobile phone maker Dancall, is a sign of things to come, it is hard to disagree.

Dancall has tremendous potential, and looks placed to milk pounds 150m of sales next year from the booming mobile phone market in the UK. That is even before Orange has rolled out across the whole of Britain.

Mobile phones, however, are by no means the replacement for the blockbusting computer products with which Mr Sugar made his fame, and it will take considerably more effort elsewhere to drive the company back to its former glory.

Viglen, another acquired business which sells personal computers direct to customers, is also doing well, but Amstrad's traditional brown goods such as televisions and video recorders continue to struggle. Amstrad Trading, the brown goods division, was primarily responsible for the first-half loss.

Despite the problems, investors are becoming convinced that Amstrad is locked in forward gear. The shares climbed 18p to 201p, and look undervalued on analysts' expectations of taxable profits of pounds 12m for the year and 3.1p of dividend.

Those projections translate to earnings per share of 7.4p, giving a p/e of 27. While that may look heady, the ratio falls to just 12 for next year on forecasts of 16.6p of earnings from profits of pounds 26m. Once again Amstrad looks a good recovery stock.