Seton grows fat on others' crumbs

The Investment Column
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Seton Healthcare is one of a handful of opportunistic drugs firms that have grown up in the 1990s on the back of huge changes in the health- care industry. The company's raison d'etre is buying unwanted brands and businesses from big groups for whom they are merely a sideline.

Last year, Seton stepped up its spending from pounds 36m to pounds 51m and the profits have flowed accordingly. Yesterday's results showed the underlying pre- tax total rising 52 per cent to pounds 16.4m in the 12 months to February. That figure was struck before the pounds 1.89m exceptional cost of sorting out last year's main acquisition, Simpla Plastics, the UK market leader in urinary incontinence bags, acquired for pounds 20m in September. The charge wiped out Simpla's maiden profits contribution of pounds 1.52m, but having closed the head office, cut back wholesalers' discounts and run all the business through Seton's own distribution network, margin improvements should already be coming through.

This attention to basics is part of the secret of Seton's success. But while Simpla makes prescription products, most of the group's growth has been in over-the-counter medicines, where it has expanded margins by pushing a bigger range of products through the existing marketing operation. In the past year alone it has added the Asilone range of indigestion products from Boots, as well as picking up Woodward's gripe water from London International.

OTC represents 44 per cent of sales and, despite the constant need to support brands through advertising, overall margins have broken through 20 per cent. The new pounds 6m distribution centre completed near Oldham is operating at only two-thirds of capacity. Meanwhile, although gearing looks astronomical after the goodwill write-offs of the past few years, interest cover remains strong at over 10 times.

Many businesses have grown fat picking up the scraps from rich men's tables, but Seton's timing has been perfect, coinciding as it has with the increased concentration of the giants on prescription pharmaceuticals and the squeeze on medium-sized drugs groups. There should be no let-up in the number of orphan brands around after recent drugs mergers and takeovers. Equally, the prospects for the OTC market remain good, as governments and insurance companies maintain the pressure on health spending budgets, diverting people away from expensive prescription drugs to cheaper so- called self medication remedies.

Seton's growth rate is being boosted by acquisitions. Last year's like- for-like sales growth of 12 per cent is more like 9 per cent when the last two years' purchases are excluded. As the company grows, it will have to swallow bigger businesses to maintain momentum, but last year's volume growth of 6 per cent in the existing business remains impressive and there remains plenty more to buy. The trouble is, assuming pre-tax profits of pounds 20.5m this year, the shares, up 3p at 508p, are up with events on a p/e of 18. Hold.

Tom Cobleigh

comes piping hot

Tom Cobleigh has been something of a roller-coaster ride since coming to the market at the end of last year. The managed pub company with the saccharine motto, "unspoilt pubs for nice people", enjoyed a bumper first-day premium on its 150p flotation price and quickly rose to a peak of 256p. It has since fallen back to a less heady 215p.

The gyrations have been caused by a variety of conflicting factors that make valuing the company difficult. In its favour, it is plainly onto an impressive formula. Large edge-of-town family pubs with a heavy emphasis on food are flavour of the month and nobody seems to create much better ones than Tom Cobleigh.

It has also benefited from enormous enthusiasm in the City for the managed pub sector and a healthy dollop of bid speculation. Set against that are understandable worries about the company's gearing and cash flow.

Attention to detail, the creation of a brand, an emphasis on staff training and motivation and an understanding of the psychology of eating out was clearly reflected in a 48 per cent rise in operating profits to pounds 3.9m in the year to March. Pro forma earnings per share, assuming a full-year benefit from the pounds 21m flotation proceeds, increased 32 per cent to 8p and a dividend of 1.6p was paid (in a full year on the market it would have been 2.7p).

Cobleigh makes 40 per cent of its sales from food and it is attracting customers at times, such as between 5 and 7 o'clock, when many people want to eat but most pubs are not serving food. Its research shows that many customers think of its sites as Tom Cobleighs first and pubs second, a reflection of its success in creating a viable brand.

The group plans to spend pounds 25m on capital expenditure this year, adding 15 pubs to its current managed portfolio of 41. That would plainly put a big dent in a balance sheet boasting net assets of pounds 40.7m and pounds 6.9m borrowings. Sale and leaseback deals look likely to ease gearing which should end the year at about 70 per cent.

Putting a sensible price on this mix of factors is further complicated by speculation that Cobleigh's venture capitalist backers, owning 50 per cent of the shares currently, will be open to a sensible offer from a major such as Whitbread, keen to muscle in on a plainly attractive formula.

On the basis of forecast profits this year of pounds 4m, the shares stand on a prospective price/earnings ratio in the low 20s.

Even for this sector that is high on fundamental grounds, but speculative froth puts a floor under the shares. Hold.

Allied Carpet

times it right

Allied Carpets' decision to seek a stock market listing is nicely timed. The new issues market is booming and recent retail floats such as Harvey Nichols and La Senza have proved popular.

The market is also kindly disposed to the larger specialist furnishings groups after the spectacular success of Carpetright and DFS Furniture. These companies have performed wonders by concentrating on one product in a fragmented market where most of the competition are small, privately owned concerns with limited capital to expand.

Shares in Sir Phil Harris's Carpetright have risen fourfold since they were floated on the stock market three years ago. DFS shares have doubled during the same period.

Though yet to be priced, the Allied Carpets float should prove interesting for the private investor. Born out of a Lowndes Queensway management buyout in 1991, it has 207 stores of which 172 trade under the Allied Carpets name and are aimed at mid- to upmarket customers. Eleven more trade under the Carpetland banner which targets a lower price bracket. There are 22 General George Outlets in Ireland.

Allied has 12 per cent of the market which it claims puts it neck-and- neck with Carpetright. It aims to double that share over the next four years. The expansion is likely to come from expanding the main Allied chain. A new Carpetland format is being tested and may be rolled out.

Though this will mean taking on Sir Phil's Carpetright head to head, market share is more likely to be gained from the independents which still account for 59 per cent of the market.

Since the takeover of Carpetland in 1993, Allied Carpets has been posting impressive figures with profits rising from pounds 202,000 to last year's pounds 12.2m. In the six months to the end of December the company reported profits of pounds 7.3m on sales of pounds 110m.

The float should value the firm at around pounds 200m and will raise pounds 10m- pounds 20m of new funds for expansion. With a possible rise in consumer spending backed by tax cuts, building society windfalls and the maturing of Tessas, the shares could be worth a look.

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