Shares: Scots hone an edge on hard times

SCOTLAND has mainly avoided the boom-and-bust cycle that has devastated much of England. Not that this is an occasion for much euphoria. Unemployment is high, and it is more that the recession of the early 1980s never really went away.

But this combination of almost permanent recession with Scottish caution and a national aversion to extravagance has bred some highly successful companies, a number of which are making effective forays south of the border.

One particular star is the Edinburgh-based local newspaper group, Johnston Press, at 545p. It has used its profitable Scottish operations as the base for an aggressive acquisition drive into England. Fred Johnston, family scion and chairman, has such a laid-back manner that it is easy to underestimate his business. But the figures tell a remarkable story. Since 1988, pre-tax profits have grown from pounds 4.3m to pounds 9.8m, with earnings per share nearly doubling from 12.4p to 22.7p. The group's speciality is owning the leading paid-for title in numerous locations and defending that position with the ferocity of a Scottish wildcat. It has also cut costs dramatically throughout its operations by installing new production technology. The management, led by a trio of chairman, managing director and finance director who have been together for many years, has shown a remarkable nose for deals that has taken them into related areas such as bookbinding and library bookselling, as well as adding newspaper titles on attractive terms.

Forecasts point to earnings per share reaching 25p for 1993 and 29p the following year, with the price-earnings ratio, even on the latter figure, over 18. But a good performance in recession has shown just how high-quality those earnings are, and there is plenty of scope for more earnings-enhancing deals and pleasant surprises on the profits front if economic activity picks up. Relative to the potential, the shares offer excellent value.

A significantly more gung-ho local growth stock is Shoprite, the rock-bottom-prices food discounter, at 141p. It has just reported a 50 per cent increase in interim earnings and shop numbers up from 33 to 60. It has also announced an opening programme of two stores a month stretching far into the future. As has been widely reported, other food retailers have targeted Scotland for growth, notably Sainsbury and the rival discounter Kwik Save. But the management team at Shoprite, which has its headquarters in the Isle of Man, although the business is increasingly Scottish-based, is unworried by the competition.

I have visited Shoprite in Scotland, and I can see why they are confident. I don't think I have ever seen such an adrenalin-charged operation. New stores are brought on stream so quickly that the food is put on the shelves while the carpenters are still nailing them to the wall.

When Kelloggs threatened to hold back supplies because of the group's ultra-low prices, Deryck Nicholson, the chairman, threatened to take it to the European Court. Some London-based analysts are sceptical, but for investors who like an exciting ride, Shoprite looks the perfect buy.

Two other high-quality Scottish growth stocks are A G Barr, the soft drinks manufacturer of Irn-Bru fame, at 373p, and the conglomerate Sidlaw, at 345p, which has been successfully refocused away from textiles to packaging and oil-field and port services. Robin Barr, the Barr chairman, has a reputation for not overburdening analysts with information, although I have found him happy to talk in the past. But his company is making inroads into England, where it still has a comparatively tiny market share, and profits are expected to forge steadily higher, after an unsustainable surge in the past 18 months.

Sidlaw's prospects also look excellent, with growth expected to accelerate in the year to 30 September 1994, for which the prospective p/e could be an enticingly modest 13 or less.

Two interesting special situations are Clyde Blowers, at 625p, and Richards, at 77p. The latter reported a hefty loss, albeit much reduced, for the first six months of 1993, but acquisitions from the collapsed Coloroll and from Courtaulds have made it the dominant player in the UK worsted-yarn spinning market.

Structural changes in the carpet market, exemplified by the recent flotation of Carpetright, lead some observers to expect a rapid transformation in the group's fortunes, with a modest profit this year.

Clyde Blowers is a tiny company, with just a million shares in issue and an uninspiring trading record. The shares have trebled in the past 18 months, because of the arrival of a new management team led by James McColl, formerly chief executive of Hunting Oilfield Services. He owns 30 per cent of Clyde jointly with 3i. Investors wanting to come in for the ride should realise that the shares are thinly traded and likely to be hard to buy or sell.