Investment Column: Debt pile casts a shadow over Enterprise

Derwent London; Diploma
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Our view: Sell

Share price: 85.3p (-3.2p)

Enterprise Inns may have been out of favour with the City for as much as five years but the country's second biggest pubs group yesterday gave its beleaguered shareholders some hope for a brighter future.

Despite its half-year pre-tax profits falling by nearly a third over the six months to 31 March, the debt-laden operator said average income per pub had remained "stable" at £31,200 over the period.

Enterprise has also slashed its net debt by £175m over the half-year, although its borrowings still stand at £3.51bn. Above all, the group raised the prospect of reinstating dividend payments after a hiatus of nearly three years, with analysts tipping the interims next year as a likely date.

However, this does not mean that Enterprise is back in rude health, and its share price today remains a distant memory to the 778p it hit four years ago in May 2007.

Indeed, the half-year saw pre-tax profits tumble to £61m, although a 9 per cent reduction in the size of Enterprise's estate was partly to blame for the lower profits. The pub group sold 212 pubs, along with other property assets, for a net £47m over the half-year. This fits its strategy of selling "poorer quality and potentially unviable pubs". Enterprise's latest profits were also dented by a sale and leaseback on 71 pubs, which resulted in a higher rent bill.

Furthermore, like-for-like net income in its "substantive", or leased, estate, fell by 2 per cent over the half-year. Given the outlook for consumer spending, we don't see much upside for trading at Enterprise this year, even though it admitted to getting a boost from the balmy April weather and glut of bank holidays.

That said, some investors may be attracted to the potential dividend and will be pleased to note that Enterprise trades on a cheap forward earnings ratio of 3.6. However, given its high debt levels and sprawling estate, we don't see much fizz in its shares for the foreseeable future.

Derwent London

Our view: Hold

Share price: 1,725p (-5p)

Derwent London issued an encouraging update yesterday, with the property group's chief executive, John Burns, confirming that the central London office market had continued to "perform strongly" over the first quarter.

That chimes with the recent surveys, and sits well with the share price gains over the past year or so. The market has been happy to reward Derwent, which is up more than 25 per cent since the beginning of May last year, and the update showed that investors' faith was not misplaced.

Moreover, the outlook remains positive, with Derwent making good progress on lettings and advancing projects in its development pipeline. No wonder then that, alongside the update, the company decided to launch a £175m convertible bond.

The cash will help to fund the pipeline, and increase Derwent's resources as it exploits the capital's lucrative property market. But, while we have confidence in the business, we worry about the valuation. Panmure Gordon puts the stock on a 13 per cent premium to net asset values, which makes us cautious. There is no reason to sell. But we would wait for a better time to buy.


Our view: Buy

Share price: 362p (+2p)

Back in March, Diploma raised investors' hopes when it announced that its business was on track to beat the market's expectations for the year. Yesterday, it went some way to delivering on that promise, with the group's first-half figures justifying its bullishness. The company, which supplies specialist technical equipment and services to a number of industries including the construction sector, revealed a rise in its pre-tax profits of 50 per cent, while revenues climbed by nearly a third.

The impressive set of numbers shows that the group is still benefiting from the economic recovery, and particularly encouraging is its organic revenue growth of more than 20 per cent, driven by a 30 per cent advance from its seals unit. It also looks as if it has the finances to dip into its pockets for further acquisitions.

We've been recommending Diploma for a while now, and our faith has certainly been rewarded with its share price more than doubling in the past 14 months.

But the stock still appears to have upside, especially considering the fact that it could potentially be in line for promotion to the FTSE 250.