THE INVESTMENT COLUMN : More selective appetite at St Ives keeps City satisfied

A 1980s spending spree left St Ives with a nasty bout of indigestion in the early 1990s. But the printer's relative abstinence since then has helped acquisitions to bed down well to create a low-cost, quick-turnaround printing operation with substantial shares of the markets in which it operates.

It is a formula that continues to please the City. Yesterday's 31 per cent rise in pre-tax profits to pounds 35.5m for the year to July, after stripping out the pounds 4.93m exceptional loss on disposals in 1994, was at the top end of expectations. That helped to send the shares strongly against the market trend yesterday to record an 11p rise to 416p.

Despite the 11 per cent increase in turnover last year, it has hardly been a boom period for St Ives. Books, where the group has about a fifth of the UK market, suffered from flat conditions for paperbacks, which were only saved by a pounds 7m contract to print the Penguin 60s celebration series.

Likewise, it was a dull year for financial work. With close to 20 per cent of the high-security business that accompanies every big City deal, St Ives suffers when transactions are low, as in 1994-95.

Luckily the broad spread of the business helps to make up for laggards elsewhere. Magazine production volumes grew with higher pagination and new titles, including eight wins from IPC, which will go a long way to filling the capacity of the new third press at the Caerphilly plant. Meanwhile, the recovery in the US, where profits jumped from pounds 185,000 to pounds 1.67m, continues apace. The problems of two years ago, when medical printing work fell away under the impact of the administration's health reforms, now look a thing of the past as management focuses on profitable work.

The outlook for the existing business looks set fair. Financial work, led by the outbreak of bid frenzy in the electricity sector, should be on course for a good half-year at least. Meanwhile, the final demise of the net book agreement will probably on balance benefit St Ives' customers, the big publishers of mainstream books.

But perhaps of more relevance to the shares is what St Ives does with its cash pile. Net cash is expected by analysts to be back up at pounds 26m by the year end, despite the total pounds 22m cost of Johler Druck, the German printer acquired in August, and capital expenditure of pounds 29m this year.

Miles Emley, the chairman, has been commendably cautious in making acquisitions since his arrival from Rothschilds in 1993. Druck, which made pounds 2.3m last year, looks a good start in Germany and more buys are likely to follow both there and in the US. Profits of pounds 41.5m would put the shares on a prospective p/e of 15. Still reasonable value.

Market wary of Lloyds Chemists

Lloyds Chemists, Britain's second-biggest pharmacy chain, has a serious credibility problem. Despite profits broadly in line with already reined-in expectations, the shares slipped another 12p to 230p yesterday as the market focused on a downbeat assessment of current trading and slower-than-hoped-for progress on the rebranding of its troubled drug stores operation.

It is almost as if investors are looking for reasons to sell the shares, which stand 50 per cent below their level 18 months ago. Allen Lloyd, the chairman, is reported to have had enough with the Square Mile, which he believes has always undervalued the company he founded in 1973. His annoyance is understandable - after yesterday's fall the shares trade on a massive discount to the rest of the market.

That is a pretty grudging rating for a company that has just announced a 15 per cent rise in turnover to pounds 1.08bn, the first time it has breached the billion-pound mark. Before exceptional items of pounds 13.4m, foreshadowed six months ago, profits rose 5 per cent to pounds 63m, although the one-off charge and higher interest payments resulted in a fall in reported profits before tax from pounds 58.3m to pounds 42.2m.

The confidence of Lloyds' management was reflected in a 7 per cent rise in the dividend to 10.2p, the ninth consecutive rise. Its optimism was driven by good results from the chemist operation, Holland & Barrett, the health shops, and the pharmaceutical and veterinary arms.

But there is no getting away from the problems facing the loss-making Supersave drug store division. A profit of pounds 1.3m in 1994 was reversed into a loss of pounds 3.7m , the majority of which occurred in the second half. That would not be so worrying if the plan to convert a third of the chain into Holland & Barrett stores or a new health and beauty format as part of the chemist chain was progressing at a decent lick - but it is proving much slower than expected.

Trading has been clobbered by two developments. First the National Lottery has sucked pounds 100m a week, 5 per cent of all non-food retail sales, out of consumers' pockets, hitting discretionary spending. Second, new laws on Sunday trading have boosted sales in out-of-town superstores at the expense of high street shops. Competition among those who remain in-town is now intense.

Despite those worries, there is plainly a valuation anomaly in Lloyds' shares, with its 920 pharmacy licences arguably worth more than the total value of the company. On the basis of forecast profits of pounds 58.5m this year and pounds 64m next time the shares are valued at only 7 times 1997 earnings. That is cheap, but while the market continues to have reservations about the company's management they could well remain so.

Problems mount for Thorntons

Thorntons, the chocolate maker and retailer, has ill-served investors who climbed aboard at its 1988 stock market flotation. After a series of disappointments, the shares, down 4p yesterday, have climbed to just 149p from the 125p offer price.

The latest deflation of hopes comes as a result of a botched television advertising campaign last Christmas, compounded by a hot summer and the loss of a number of concessions in two greetings card chains. The net result was a fall in profits from pounds 12.1m to pounds 10.5m for the year to 24 June. The only consolation for shareholders is an 8 per cent rise in last year's total dividend to 5.3p.

At least some of the confidence that represents stems from Thorntons' decision to seek a new chief executive, whose identity will be revealed once he has sorted things out with his current employer. In the meantime, the company is parting company with its UK managing director, David Mitchell.

The new person is said to have "extensive experience as managing director of retail businesses", but his room for manoeuvre will already be severely limited by the fact that a programme to re-orient the business has now swung into action.

Capital expenditure is being jacked up from pounds 7.7m to pounds 10m in the current year, half of which relates to the retail business. A refurbishment programme will see 50 shops redone by the year end, with 15 relocated. On top of this, Thorntons plans to open another 20 or so new outlets.

The structural and management changes have cost pounds 775,000 in the latest figures. It is not clear what the future impact will be, although there may be some offset if legal action over the loss of concessions in the Carlton Card chain, taken over by Clinton Cards, is successful.

In the meantime, assuming profits recover to at least pounds 12m this year, the shares stand on a prospective multiple of 12. Unattractive unless the family decides to sell out to a bidder.

COMPANY RESULTS

Turnover pounds Pre-tax pounds EPS Dividend

Capital & Regional Prop (I) 4.89m (3.48m) 2.04m (1.24m) 3.66p (2.85p) 0.8p (0.6p)

Cobham (I) 111m (101m) 14.1m (12.3m) 12.39p (11.01p) 3.05p (2.7p)

Cohen (I) 49.5m (35.5m) 1.80m (0.76m) 72.6p (27p) 6p (nil)

Development Secs (I) 11.9m (9.7m) 0.6m (1m) 2p (4p) 0.8p (0.8p)

Five Oaks (F) 6.13m (9.13m) 2.33m (2.28m) 2.1p (2.54p) 0.7p (0.5p)

JJB Sports (I) 37.5m (24.8m) 4.82m (2.55m) 10.36p (6.55p) 2.75p (1.22p)

Lendu (F) 0.90m (0.64m) -0.04m (-0.09m) 0.01p (0.29p) 0.25p (0.25p)

Quality Software (I) 10.1m (7.27m) 0.81m (0.60m) 9.1p (6.9p) 1.5p (1p)

William Sinclair (F) 44.4m (41.3m) 4.73m (4.17m) 14.7p (13p) 7.6p (7.15p)

Trafficmaster (I) 1.25m (0.46m) -1.12m (-0.77m) -5.1p (-3.6p) nil (-)

Walker Greenbank (I) 39.4m (36.3m) 4.2m (4.13m) 2.51p (2.88p) 1.3p (1.3p)

St Ives (F) 264m (237m) 35.5m (22.3m) 24.36p (18.46p) 8.5p (6.4p)

(Q) - Quarterly (F) - Final (I) - Interim

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