Sketchley clean-up takes time

THE INVESTMENT COLUMN

Longstanding shareholders in Sketchley, like M&G and Britannic Assurance, must be kicking themselves for backing new management at Britain's largest dry cleaning group five years ago. In doing so they passed up a pounds 90m-plus, all-paper offer from the Compass catering group, which had turned hostile after being brought in as a white knight to an earlier takeover bid from Godfrey Davis.

Since then shares in Sketchley have slithered from around 350p to yesterday's 94p, up 4p, valuing the group at pounds 60m. Having restored the group to something like an even keel, the original team has now passed the baton to new management, led by chief executive John Jackson, who arrived from Body Shop and Virgin in October.

Results yesterday showing pre-tax profits up from pounds 5.06m to pounds 6.37m in the year to March probably owe more to the previous incumbents than to Mr Jackson and his colleagues.

Cleaning up the mess seems to have taken longer than anyone expected. The closure of loss-making shops accounted for all the rise in retail profits from pounds 2.27m to pounds 2.83m. A further 26 outlets were shut, taking the total to 70 over the last 18 months, with the pounds 1.5m cost already provided for in the previous year.

The linen rental and uniforms business made better progress, with profits rising from pounds 4.76m to pounds 6.2m, although Sketchley had the benefit from a first-time contribution of pounds 790,000 from the Warrender aircraft supplies business, acquired for pounds 8m in April 1994. Warrender's early promise was not entirely fulfilled as British Airways used the opportunity of the change of ownership to renegotiate its contracts.

Mr Jackson is pinning his hopes for the retail side on a new selling proposition to customers. Services provided by SupaSnaps, the photo-processor acquired two years ago, will be available in over 500 of the 750 Sketchley outlets by the end of the year, including 113 joint sites. The opportunity is also being taken to jazz up the shops to make them more user-friendly, and Mr Jackson is introducing new merchandise, extending dry cleaning operations in supermarkets and starting trials in petrol stations.

But despite his optimism, Sketchley continues to operate in three intensely competitive markets where differentiation on anything other than price is difficult. Profits of pounds 7.7m this year would fairly value the shares on a prospective multiple of 10 until the fruits of the new management strategy become clearer. The downside should be limited by a yield of 4.6 per cent, based on last year's dividends of 3.4p, up 6 per cent.

BA sends out confusing signals fro

The mixed signals coming from British Airways' results are more confusing than an Aeroflot timetable. Record passenger numbers, record cargo figures, even record profits of pounds 452m if you exclude the exceptional item. Yet, disappointment at the continuing underperformance of BA's European and American partners continues to cast a shadow.

Of BA's strategic alliances, only the link with Australia's Qantas can be called a success. Yesterday's pounds 125m provision against BA's pounds 251m investment in USAir, however, comes just as optimism is growing about the American company's future. USAir's talks with unions are progressing well and the company halved its losses in the last quarter.

BA did not like having to make the provision, arguing that it was a technicality because its shares are listed on Wall Street. Under US GAAP rules, a company is forced to write down any loss on an investment that would not have recovered within about 18-24 months.

Not everyone is convinced. Despite the pounds 70m in revenues accruing to BA last year because of the link, the USAir investment is clearly not worth the money paid for the 25 per cent and it was helpful to see some reflection of that. Similar transparency would be appreciated when dealing with BA's investment in Deutsche BA and France's TAT, described by the company yesterday as the black spots in the results.

It is unclear how much BA paid for its 49 per cent stakes in each of the two companies, whose combined losses rose to pounds 90m last year. Neither would the company break down the losses, though it is thought that TAT is the worse performer. Qantas remains the bright spot of BA's global strategy, and was largely responsible for the pounds 22m rise to pounds 58m in profits from associated undertakings.

Productivity was up 3.2 per cent, and yields on scheduled services rose 0.6 per cent. Also, the dividend was a satisfactory 8.9p, making 12.4p for the year, and with cover at three times the prospects for future payments look secure.

BA is supremely confident about its future, but investors should hold fire. The company's alliances remain a problem, the vital US market is nearing its peak and fuel prices are edging up. Hold the shares until the picture clears.

Casinos thrive on high rollers

On Thursday, all being well, London Clubs International will join Crockfords, now known as Capital Corporation, as one of the select band of fully quoted casino operators.

Investors in LCI during its short life on the soon-to-disappear Unlisted Securities Market have already done well, seeing their shares rise from last June's 200p placing price to 316p yesterday, up 7p on the day. The reason has been LCI's ability to ride out recession on the back of high rolling Middle and Far Eastern clients.

Over four-fifths of last year's operating profits of pounds 32m, up from pounds 25m the year before, came from just two upmarket casinos in London's West End. Les Ambassadeurs, just off Park Lane, and the Ritz, in the basement of the eponymous hotel, are heavily reliant on clients prepared to put up tens of thousands of pounds.

But their performance hides a seven-figure turnaround in the more downmarket Golden Nugget and Sportsman outlets, also in London.

LCI's pre-tax profits of pounds 29.4m, up from pounds 14m, are pretty meaningless in the light of last year's pounds 27.5m capital raising. Pro forma figures show profits up from pounds 23.1m to pounds 30.4m, with earnings per share rising 36 per cent to 26.7p.

Standing on a historic price/earnings ratio of 12 and supported by a yield of 5.2 per cent, based on a 13.25p dividend for last year, the shares look reasonable value. Added spice comes from the Barclay Brothers' 24.6 per cent stake.

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