The Investment Column: Johnston hit by slowdown but it's not all bad news

Restaurant Group; Omega International
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The Independent Online

Our view: Hold

Share price: 182.75p (-5.5p)

Johnston Press relies on advertising for 73 per cent of its revenue, so profitability was always likely to get a jolt with marketing budgets being cut in light of the economy's troubles.

The publisher, which boasts The Scotsman and Yorkshire Post among its 300 or so newspaper titles, recorded a pre-tax profit of £137.4m last year, a 6.3 per cent fall on 2006, despite a 0.9 per cent increase in revenue to £607.5m: the performance is in line with the expectations of analysts at Landsbanki.

This year is unlikely to be much easier. The business's shares have fallen 53.6 per cent in the past 12 months, and the start of this year has brought a 4.2 per cent decline in advertising; the company itself is sayingthat "visibility" is not great.

Parts of the business performed well last year. Advertising in its property publishing business was up 5.4 per cent, although Landsbanki predicts this sector is "particularly exposed" in 2008. Other areas were well down on the previous year's figures, with advertising in its motoring division falling by a striking 8.2 per cent.

It is not all gloom. Johnston's revenues from its digital operations grew by 34 per cent to £15.1m, and even though this accounts for just 2.5 per cent of the group's overall revenue, the company points to the growth in the number of its online readers, with page impressions, the number of times a web page is visited, up by 53 per cent.

However, the business will have to rely on the growth of its existing titles to gain ground in the online market. In the past the group has relied, at least in part, on acquisitions for growth, something that the company concedes is going to be difficult in the short term.

The firm also completed work on two new presses in Portsmouth and Dinnington last year, and uses them to print other publishers' newspapers, a practice that earned the group £35m in 2007, an increase of 28 per cent. Hold.

Restaurant Group

Our view: Up with events

Share price: 145p (-1p)

Eating out is proving a difficult habit to give up, even when household budgets are stretched. So it is no surprise that there are signs of life again in the restaurant trade after last year's sharp slowdown which triggered a round of profit warnings.

Restaurant Group, which operates 300 units, including Garfunkel's, Chiquito and Frankie and Benny's, lost over a third of its value on the back of a dismal final quarter when sales growth collapsed from 7 per cent to 1 per cent. The company believes that images of queues of depositors outside Northern Rock branches sapped confidence and left people struggling with higher mortgage repayments reluctant to spend money.

But business is coming back strongly, helped by interest rate cuts. Sales in the opening nine weeks of this year are ahead by 4 per cent, which is a lot better than some other operators, particularly those positioned in the high street.

Restaurant Group left the high street several years ago for more resilient out-of-town sites, in leisure parks, where they are close to cinemas to attract extra traffic, in airports, where they gain from longer opening hours, and in suburban locations, with meals priced at an affordable £10 to £16.

However, prospects remain uncertain. Food costs are rising fast, although it is resisting the temptation to tweak its menu prices, at least for the time being. It is also sticking to its opening programme, with plans to roll out another 30 to 35 restaurants in the current year. With Frankie and Benny's, its biggest chain, it believes there is scope for another 90 outlets on top of the 159 at present.

Last year's profits came in nearly a quarter higher at £43.5m, slap in line with forecasts, allowing a 21 per cent hike in the dividend. The shares have risen 32 per cent since we recommended them in early January. But this will be a difficult year, and on the current valuation of nearly 9 times expected earnings they look up with events.

Omega International

Our view: Attractive

Share price: 256.5p (+17.5p)

It is a lot cheaper to buy a new kitchen than a new home, which may explain buoyant trading at Omega International, which designs, manufactures and supplies a range of mid-priced kitchens to over 500 independent retailers.

Omega has a decade of double-digit profit growth under its belt, but is also benefiting from the slump in the housing market. Families unable to move are consoling themselves by splashing out on new kitchens and bathrooms. The management team has experience of mass manufacturing at the Spring Ram bathroom group.

The key to profitability is producing units cheaply and efficiently from a modern factory complex in Doncaster. The kitchens, under the Omega, Sheraton and Chippendale brands and priced between £6,000 and £20,000, can be delivered to dealer showrooms within seven days of an order being placed.

Omega has just 3 per cent of the £1bn kitchens business, where there are hundreds of operators, but aims to double its size by 2010 by offering keen prices, improved product ranges, and on-time deliveries. Last year's profits of £8.1m, up 27 per cent, are expected to grow to £9.6m this year, leaving the shares, up 7.3 per cent, on 10.75 times current year forecasts. Attractive.

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