THE INVESTMENT COLUMN
The pre-press and printing group Wace looked to be headed for oblivion three years ago, when the new chief executive Trevor Grice came aboard. He found a company struggling under debts of pounds 100m, gearing of almost 200 per cent and an unpleasant whiff of scandal - alleged links with the IRA are hard to shake off.
The departure under a cloud of the former chief executive, John Clegg, amid rumours of insider dealing, and a string of profits warnings had sent the shares into freefall. From a peak in 1991 of 283p, they fell to less than a quarter of this.
The change in Wace's fortunes since then has been remarkable, not least because it has been achieved with no recourse to the stock market and no disposals of the family silver. The new team was right that a good underlying business was battling to escape from the straitjacket of excessive borrowings.
Bringing debts down to a manageable level has been hard work, involving a tough rationalisation programme, but it has not passed unnoticed by the market. The shares, which bottomed at 62p in January 1993, closed yesterday at 238p, up 18p on the day as interim profits came in slightly ahead of expectations.
Pre-tax profits, before a one-off charge to cover the disposal of troublesome Italian and German operations, jumped 22 per cent to pounds 13.5m as margins pushed ahead from 8 per cent to 9.1 per cent. Earnings per share improved a more modest 9 per cent to 9.4p, as the tax charge edged up, but the dividend, still generously covered, was given a 23 per cent push to 1.85p.
The market welcomed that show of confidence, as it did the announcement that, recovery now being largely over, Wace is back on the acquisition trail. With gearing down to 32 per cent and being driven down fast by strong cash-generation, the company has plenty of firepower.
Wace is in its best position for years. Its markets are still showing good growth, despite the worries of the sceptics that desk-top publishing would squeeze the professionals out. The challenge is to cope with rapid changes which are turning the likes of Wace from inky-fingered artisans' operations into very high-tech information processors. Profits growth will come from navigating that change within the existing businesses and applying it to underperforming acquisitions. This year analysts think profits will forge ahead to about pounds 27m, giving earnings per share, on a near-normal tax charge, of 20.5p. That puts the shares on a prospective p/e of 11.6, pretty attractive compared with the rate of recovery. The shares have drifted sideways for a couple of years, but yesterday's movement suggests they could have resumed an upward tack.
Thorn fans await their big break
Thorn EMI's results have become a mere sideshow to the continued speculation over when and how the demerger and possible break-up of the business might take place. It is break-up talk that has been fuelling the share price, which has enjoyed a meteoric rise since the beginning of the year. From 997p in January, the shares have rocketed to 1,437p.
The rise has continued since the company's annual meeting in July when Sir Colin Southgate, chairman, confirmed that a demerger would be in shareholders' best interests. The company plans to consider proposals to hive off the rental operations to form a separate company, with the HMV record shops lumped in with the EMI music business. Analysts expect the de-merger to go ahead next year.
But, as sideshows go, yesterday's results were pretty good. Profits for the three months to June nearly doubled from pounds 32.6m to pounds 63.7m, though Sir Colin warned that this level of growth was unlikely to continue as this quarter included exceptional gains. First, the closure of the loss- making Rumbelows chain in March eliminated the pounds 6m of losses incurred in the equivalent quarter last year. The consolidation of the Toshiba- EMI figures into EMI music results boosted the music subsidiary's figures.
But the trends are also encouraging at the trading level. Even stripping out the Toshiba figures, profits at EMI increased 10.6 per cent. In the rentals business, which includes Radio Rentals and the fast-growing Crazy George's format, operating profits increased by 42 per cent to pounds 36m. Half the growth came from organic expansion.
At HMV, profits also grew strongly, boosted by the opening of more than 20 new shops. Like-for-like sales grew by 7 per cent worldwide and 13 per cent in Britain.
The Dillons bookshops, acquired from the receivers earlier this year, increased like-for-like sales by 3.6 per cent, though the inclusion of Dillons doubled the division's seasonal loss to pounds 7m.
What is hard to judge is whether Thorn's share price has run out of steam or whether there is more growth to come. BZW is forecasting profits of pounds 515m for the current year, which puts the shares - up 4p yesterday to 1,437p - on a forward rating of 20. Corporate action such as a bid for EMI could send the shares higher, but on fundamentals, they look fully valued.
Kalon spreads itself thin
Kalon has been transformed since May's pounds 330m acquisition of the paint business of Total, the French oil company. Overnight, the small Yorkshire-based group, which turned over pounds 157m last year, became Europe's second-largest producer of decorative paint (after Akzo Nobel), selling more than pounds 520m worth a year.
With Euridep under Kalon's belt for just 10 weeks, it is a little early to judge the performance of the revamped business, but other trends are clear. Half-time results to 1 July, out yesterday, confirmed that the UK paint market remains as tough as when Kalon issued a profits warning last December.
Pre-tax profits, up from pounds 10m to pounds 11.6m, were only kept moving forward by a pounds 2.76m maiden contribution from Euridep, while earnings per share slumped to 4.68p from 5.17p. The original business saw profits slip to pounds 9m as Kalon pitched aggressively for market share at a time of soaring raw-material costs and soggy demand.
So while Kalon has raised its already impressive two-thirds-or-so share of the UK private-label market even further, margins sagged from 12.3 per cent to 10.4 per cent. That, and the fact that around four-fifths of Euridep's profits come in the first half, led to profit forecasts being slashed to around pounds 28m for 1995, putting the shares at 151p, down 2p - a forward multiple of 21.
Mike Hennessy, Kalon's managing director, has shown with the 1993 acquisition of Novadec what can be done in France. Novadec now commands half the private- label market there, and its margins have been increased to 15 per cent by the British group's greater purchasing power.
With six factories and 3,300 employees, compared with Kalon's 1,700-strong workforce and five factories, there should be scope for substantial rationalisation at Euridep. Up to pounds 15m a year could be shaved after detailed rationalisation plans are revealed in October, but it may not be until 1998 before the benefits are fully realised. With a three-year wait in prospect, the shares are high enough.
Turnover pounds P/Tax pounds EPS Dividend
Ben Bailey (I) 11.3m (9.2m) 103,000 (70,000) 0.66p (0.45p) 0.3p (0.3p)
Graseby (I) 45.1m (47.4) 5.4m (5m) 5.8p (5.8p) 2.7p (2.7p)
Hambro Countrywide (I) 73.7m (49.2m) -5.8m (-707,000) -1.92p (-0.21p) - (-)
Kalon Group (I) 114.6m (83m) 11.6m (10m) 4.68p (5.17p) 1.6p (1.5p)
Mersey Docks (I) 70.2m (61.5m) 16.8m (15.8m) 12.56p (1.72p) 3.56p (3.3p)
News International (F) 841.3m (733.5m) 778.7m (360.9m) 53.69p (26.18p) 1.62p (0.72p)
Parity (I) 61.5m (38m) 3.1m (2m) 4.8p (3.5p) 1p (0.75p)
Relyon 24.8m (22.5m) 2.75m (2.6m) 8.6p (8.2p) 2.2p (2.1p)
Specialeyes (I) 9.5m (9.5m) 146,000 (-187,000) 0.63p (-1.22p) - (-)
Thorn EMI (Q) 1.05bn (931.1m) 63.7m (32.6m) 8.4p (3p) - (-)
Wace Group (I) 159.3m (164m) 10m (11m) 7.3p (10p) 1.85p (1.5p)
WSP Group (I) 11.7m (10.2m) 854,000 (545,000) 2.6p (1.9p) 1.1p (1p)
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