THE INVESTMENT COLUMN
Friday 06 October 1995
The launch yesterday of the latest satellite communications product from Racal's joint venture with Honeywell confirms that, in some areas at least, the company is still at the forefront of technological developments. Apart from the obvious advantages of providing business travellers with the means to keep in touch, the ability to track aircraft precisely will be hugely attractive to airlines.
It is good news for a company which, after years of effortless progress, when its share price soared, has had to come to terms with corporate middle-aged spread, looking enviously at younger, fitter businesses developing products and bringing them to market rapidly. Racal has struggled to keep up.
Most recent figures confirmed that the company's large and vital data products division, which churns out modems, credit-card terminals and computer peripherals, remained mired in management and technical problems. Even including the Camelot share, which on some measures was overstated anyway, the division's return on sales was still a measly 4 per cent.
The company is actively considering a sale of the operation, or a joint venture to share the pain, and, in the face of increased competition from small niche producers in the US able to deliver cheaply tailored products to the market, it is difficult to see how tinkering around the edges with admittedly pretty sweeping management changes can really help.
Racal will thank its lucky stars it took a flutter on the Lottery. On current forecasts Racal's share of Camelot's profits could amount to pounds 16m in the year to next March, making it the single largest contributor to group results. That is good and bad news.
Given recent hints from the evangelical socialist wing of new Labour, the risk of regulatory or political interference in the Lottery has increased markedly and investors must question the extent to which those earnings can be seen as a high-quality profits stream.
Over the years, Racal has been a fantastic investment. Since 1985 the shares have risen more than 10-fold as its chairman, Sir Ernest Harrison, has nurtured businesses like Vodafone and Chubb and cashed in when they were mature enough to leave the nest. Analysts have argued that actions to realise the underlying value of its businesses could enable the share price to approach 330p.
That looks optimistic given the current share price of 270p, which on forecast profits before tax this year of pounds 74m implies a pretty demanding price/earnings ratio of 16. With no support from a forward yield of 2.8 per cent, that takes a lot on trust.
Amstrad rewards patience, at last
Patient investors may finally see their virtue rewarded, as Amstrad at last emerges from the sea of red ink in which it has been wallowing since 1991. The recovery had been expected since early this year, taking shares to the 250p level. Confirmation yesterday that the corner had indeed been turned pushed the price over 260p.
Amstrad has suffered in the past from the at-times overbearing behaviour of its founder and guiding spirit, Alan Sugar. But Mr Sugar's marketing skills are still appreciated in the City, even more so now that he has recruited the excellent David Rogers, the company's much admired chief executive.
The pair managed to wrestle with Amstrad's two major problems in the course of the past year: over-reliance on the underperforming ACE - makers of the old-line Amstrad computers and other equipment - and the late start at Dancall, the mobile phone company on which Amstrad is pinning so much of its hopes.
An aggressive move into cellular phone manufacturing is surely a good move. Companies such as Nokia and Ericsson have kept investors happy with climbing earnings and strong profits, riding a worldwide boom for mobile phones. Like satellite dishes in the Eighties, the mobile phone looks like a real winner. ACE is still performing poorly, but management has managed to cut inventories and expand sales through catalogue direct sales.
A four-month delay at Dancall has hurt the shares a bit this year, but assurances that output should rise to about 800,000 handsets a year were encouraging. Viglen, bought last year for an initial pounds 30m, performed in line with expectations, suggesting Mr Sugar still knows how to pick his way through the acquisitions maze. He promises more of the same, spending perhaps pounds 300m in cash and shares.
Pre-tax profits are forecast to rise to pounds 25.5m in the year ending June 1996, and perhaps pounds 45m the year after, for a current year multiple of six times. Cheap anyway, but particularly in light of the company's cash- rich status. Amstrad has squirrelled away pounds 141.9m at the bank. With forecasts like those and the improvement from mobile phones, the shares remain attractive.
Strategy pays off at Storehouse
Keith Edelman of Storehouse is still pursuing better margins in preference to sales at both British Home Stores and Mothercare, and the strategy seems to be paying off in spite of four months of poor weather for clothing sales in the last six.
Allowing for the disposal of One Up, group sales in the six months to October 14 should be between 1 and 2 per cent ahead of last year, the company told a group of institutions and analysts yesterday. Like for like sales will be down at British Home Stores but Mothercare continues strong trading.
Customer discounts on Choice, the group card will be relaxed, allowing points earned up to Christmas to be carried over.
Six new BhS stores will be open by then and existing stores are being revamped and extended.
The sales mix at Mothercare has moved significantly in favour of clothing, where margins are much higher than in hardware. But better stock control is the real key to continuing improvement.
Analyst Andrew Hughes at PDSB is expecting interim profits to reach pounds 28.5m, against pounds 24.2m at the same stage last year but is leaving his full-year forecast at pounds 110m, up 20 per cent.
The shares edged up a penny at 301p but they have come a long way from the low a year ago.
The City currently prefers them to M&S, and even at 20 times earnings there should be more to come.
Turnover pounds P/Tax pounds EPS Dividend
Amstrad (I) 272m (239m) 3.1m (-19.9m) 2.2p (-16p) 2.5p (2.5p)
Barry Wehmiller (I) 90.4m (82.1m) 7.1m (5.1m) 10.4p (7.5p) 7.3p (6.7p)
Bridgend (I) 8.12m (9.17m) -0.09m) (0.07m) -0.3p (0.1p) 0.1p (0.1p)
Brunel (I) 160m (151m) 17.0m (-71.5m) 13.7p (-63.4p) 0.5p (nil)
Ferrum (I) 16.9m (19.5m) -2.93m (4.19m) -11p (-33.01p) nil (nil)
Galliford (I) 210m (220m) 1.2m (-5.9m) 1.11p (-5.04p) 1p (1p)
Hopkinsons (I) 56.4m (53.8m) -0.58m (-0.75m) -1.23p (-0.45p) 0.5p (0.5p)
T J Hughes (I) 22.1m (21.1m) 0.06m (0.33m) 0.21p (1.11p) 0.8p (0.8p)
Johnston (I) 65.9m (67.7m) 3.79m (2.41m) 22.67p (12.91p) 4.0p (3.5p)
McBride (I)* 437m (410m) 27m (22m) 14.7p (-) nil (-)
Meggitt (I) 166m (162m) 8.1m (8.6m) 2.2p (2.5p) 1.3p (1.3p)
Turnpyke (I) 1.19m (1.25m) 0.003m (0.016m) 0.03p (0.22p) nil (nil)
(Q) - Quarterly (F) - Final (I) - Interim * EPS on pro forma basis
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