THE INVESTMENT COLUMN
Asda has come a long way since Archie Norman jumped aboard three years ago, a much needed breath of fresh air at a tired retailer that had underperformed its peers for years. But its property deal with British Aerospace has always been a bit of a drag. Struck in 1989 when Asda needed funds after its purchase of a group of Gateway stores, the sale and leaseback on 34 stores raised pounds 376m but left Asda as BAe's tenant.
Yesterday's deal to unwind the Burwood House relationship has two benefits for Asda. It means the supermarket group will not be subject to an onerous rent review in two years which could have seen rents rise by 20 per cent.
It also gives Asda greater control over its stores, many of which are being refurbished or expanded. Asda will now own the freehold of half its 204 stores, taking it closer to the industry average.
Burwood is, however, tinkering around the edges. The big question remains: where does Asda go now its recovery phase is almost over. Asda is established as a lower-cost alternative to the likes of Sainsbury and Tesco. It has sacrificed margin to build volume and has been rewarded by industry-beating, like-for-like sales growth of 8 per cent. Stores are being refurbished and better computer systems introduced.
Even after the Burwood deal, which takes gearing to 20 per cent, Asda is still lowly geared and generating cash. Though it plans to add six stores a year it needs another outlet for expansion. Unlike Sainsbury and Tesco it has no overseas interests and no derivative formats like a Tesco Metro. It is no coincidence that Asda is advertising for a strategy director. Mr Norman may decide that more of the same is acceptable but a large acquisition is not out of the question.
Since Mr Norman joined, the share price has increased from a low of 23p in August 1992 to the current 104p. Even this year the shares have risen by 50 per cent, and by 20 per cent since the company announced excellent results at the end of June.
Worryingly, since those results, directors have sold more than 4 million shares.
NatWest Securities is forecasting profits of pounds 284m for the current year which puts the shares on a forward rating of 15. Though the food retailing sector is still attractive Asda is no longer at a discount and has lost its relative appeal.
Aran does little
to cheer oils
The pounds 161m bid by Arco for Aran gave the oil-exploration sector a fillip, but it was hardly the boost investors might have expected. Compared with Aran's 19.75p jump to 64p, the rest of the sector's rises were fairly tentative.
After the sector's dreadful showing over the past five years, embattled shareholders in the smaller oil companies would have hoped for something more. Since September 1990, when the sector followed the oil price's meteoric rise during the Gulf crisis, oil shares have underperformed the market by more than 70 per cent.
The market's indifference to yesterday's news reflects the belief that the attraction of Aran to Arco is really a one-off, boiling down to its position in the attractive Schiehallion field to the west of the Shetlands. For the rest of the sector, the fundamentals look as gloomy as ever.
The most important determinant of the share prices of pure exploration stocks is the oil price. A high price boosts current profits but, more importantly, it levers up the value of expected future cashflows used to calculate companies' net asset values.
The oil price has fallen steadily throughout the 1990s and analysts expect a flat nominal price for the next couple of years, implying further real declines. Demand for oil products continues to rise but so does production. Coupled with the threat of Iraq's return to the exporting fold, a resurrection of the Russian industry and worries about Saudi Arabia pushing for volume at the expense of price, crude looks set to remain around $17 a barrel, putting the lid on asset-value calculations. In that context, the premiums to net assets most oil explorers enjoy are unsustainable - but a word of caution: the company trading on the highest premium last week, and the most obviously expensive, was Aran.
Given that oil-exploration stocks have performed so appallingly in recent years, there seems little to gain by selling out of the sector now the whiff of bid speculation is back in the air again. Hold on.
Fine theory, but still a risk
Nursing Home Properties yesterday became the latest company to make the move from Rule 4.2 to the new Alternative Investment Market.
A start-up business, it raised pounds 15.5m through a placing and offer earlier this year to invest in the fast-growing market for residential care, not running homes but buying properties and renting them out to other operators.
In theory, it is a safe and attractive property investment business. NHP uses its existing portfolio of homes to raise further funds in much the same way as an individual might remortgage his house. The cost of that is less than the gross yield on renting out the homes, which in the few months since the company was formed has topped 10 per cent.
The company's articles ensure that the profit generated by that differential is then passed on more or less completely to shareholders and a yield of more than 7 per cent is expected from the shares. With long leases, the only real risks are of tenants defaulting.
Certainly, the underlying trends supporting the market are attractive. Demographic changes mean that the number of people over 85 is set to soar over the next 20 years.
An under-supplied market will require spending of perhaps pounds 3bn by the turn of the century.
NHP is small and untried, and in its short life has already stumbled. Having failed to persuade private investors to go for its initial launch, a planned pounds 25m cash raising became just over pounds 15m. And having promised a small initial dividend in the year to September, shareholders were told yesterday they would have to wait until next time for a payout. For most investors the delayed reward won't compensate for the risk.
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