St Michael joins the mortals

THE INVESTMENT COLUMN
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The Independent Online
The City has become so accustomed to Marks & Spencer bucking the retail trend that it came as quite a shock to find that St Michael is human after all. Yesterday's figures from Britain's largest retailer were not bad given the grim trading environment but they showed that even M&S is finding it tough going on the high street at the moment.

Pre-tax profits for the six months to September were up almost 9 per cent to pounds 385m, boosted by a strong contribution from financial activities, which include the M&S charge card.

The main disappointment was the performance in the core clothing division, where sales increased by just 2.7 per cent. Like every other retailer M&S blames the unseasonal weather, with a summer heatwave followed by a warm autumn, which has dented sales of winter clothing. As a contrast the company says clothing sales last week were up 10 per cent on the previous year due to the recent cold snap.

Better performers were the trusty food halls, where sales increased by almost 6 per cent. Home furnishings also did well, with the wedding list proving popular.

If the picture is mixed at home it is not much clearer abroad. Brooks Brothers, the troublesome American acquisition, made a pounds 2.5m loss in the six months compared with a modest profit in the previous year, due to mark-downs on excess stock. Losses in Canada increased from pounds 2m to pounds 3m due to high rents, poor sales and squeezed margins.

M&S is not revealing detailed figures on the sale of pension and life assurance policies, which it started in the spring. But it is clear that sales are lower than hoped - it is not clear that the trustworthy M&S brand will necessarily prove a boon in financial services.

For M&S investors used to a steady rise in the share price, the past year has been a disappointment. Having started at 396p in January the shares have gone nowhere.

They have recently been hit by a series of downgrades ahead of yesterday's figures. Some analysts were downgrading further yesterday to pounds 985m for the full year, compared with the pounds 1bn previously expected.

Investors seeking a larger retail stock might be better advised to go for Boots than M&S or GUS to include exposure to the clothing sector. That said, the M&S brand name remains the strongest on the high street and, after a bout of share price weakness, they could be set for a rally, especially if the Budget is helpful. The shares were up 4p to 411p yesterday. On a forward rating of 17 they are not cheap but a good long-term bet.

Mitigating the

Allied disaster

Allied Domecq is such a disaster it is starting to look interesting. It has underperformed the market by more than a quarter over the past year and by almost 40 per cent since 1991, so institutional indignation could be rising to the point where something radical is done to reverse the tide. Whether that is a takeover, a demerger or something completely different, things can hardly get worse for shareholders, and with a 6.3 per cent yield underpinning the shares, the downside is limited.

That is the optimistic view. Taking it demands that a blind eye is turned to the string of disasters that have befallen Allied in recent years, including the ill-fated brewing merger with Carlsberg and the badly mistimed acquisition of Domecq just in time for recession and the collapse of the peso in Mexico.

Complicated as full-year figures to August were by a change of year-end and exceptional charges, a collapse in profits at Carlsberg Tetley from pounds 75m to pounds 47m, flat profits from the spirits side, including Domecq, and no growth in retailing sent out a clear message.

In spirits, more than half of group profits, extremely modest volume growth is only being achieved at the cost of a big increase in marketing spend. Pricing, the other big profits driver, is going nowhere and once again only cost savings are keeping the wheels on - the reason a radical proposal from Hoare Govett, the broker, starts to look increasingly attractive. Allied is no good at marketing spirits, Hoare says, and not bad at retailing, so why not sell the booze brands, cut the link with brewing, complete the pull-out from food and concentrate on what it can do.

The broker recommends using the sale proceeds to buy Burger King from GrandMet, repurchase a tranche of shares and invest in the core pubs, off-licences and fast food franchises. Those transactions, Hoare reckons, could create shareholder value of 666p a share compared with yesterday's unchanged close of 493p. It is a radical proposal, but with a yawning gap between share price and possible value, the shares are worth holding on the off-chance that, even if Allied isn't up to the challenge, someone else may be.

Shake-up hurts

Amersham

Amersham International is going through a difficult period as it moves away from its roots in radioactive chemicals for medical research. But it has also been guilty of failing to keep the City abreast of developments.

The shares tumbled 71p to 849p yesterday as analysts trimmed forecasts for the third time in 18 months on the back of worse-than-expected interim results and a cautious trading statement. Headline pre-tax profits to September inched ahead pounds 200,000 to pounds 19.8m, and after stripping out a pounds 1.5m exchange gain the trading result went backwards. An interim dividend pegged at 4.9p added to the gloom.

Two unexpected problems wrongfooted the company and the market. A sudden shortfall in waste processing orders from eastern Germany, which shaved pounds 3m from the turnover of the small industrial quality operation, is already being reversed. More serious and more foreseeable was a drop in US sales for Amersham Life Science. Like others in the business of supplying the research and development arms of the big drugs groups, Amersham is suffering as the industry consolidates. Divisional operating profits, up from pounds 15.3m to pounds 15.6m, were only kept moving by the exchange gain.

With margins typically over 20 per cent in life sciences, this continuing trend increases the pressure on Amersham to move to high value-added branded products. Management is confident new applications will stem the decline in sales of its Ceretec patented brain imaging agent.

But future hopes rest on Myoview, a second-generation heart-imaging agent, on course to be marketed in the US from early next year. And Amersham is well advanced in negotiations to pay pounds 60m to take its stake in the Japanese Nihon Medi-Physics to 50 per cent from next year. That could add 10 per cent to earnings. Even so, a p/e of 18, based on expectations of profits this year of pounds 48m, looks high enough.

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