THE INVESTMENT COLUMN

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The Independent Online
Income growth underpins BT

BT is running extremely fast just to stand still. A soggy domestic economy, competition from cable and a pricing regime exacerbated by relatively low inflation have together kept the lid on profits growth. No surprise then that the 5.7 per cent dividend increase was greeted with such open relief. BT may have gone ex-growth, but it can still be relied on for healthy real increases in income.

Results for the half-year to September, with pre-tax profits up from pounds 1.49bn to pounds 1.61bn, looked respectable enough, but strip out last year's exceptional premium on the repurchase of a tranche of bonds, and the underlying growth was negligible. Before redundancy charges there was actually a small decline. The fine print revealed some worrying trends.

For the first time, the number of residential lines fell, albeit by a modest 0.2 per cent. On average, the cost of inland calls fell 11 per cent compared with a year earlier, more than wiping out the benefit of higher call volumes, and leaving turnover down 4.6 per cent. The company's perennial whingeing about its regulator is taking on an increasingly desperate edge.

That is the bad news, and there is enough of it to mean the current yield of 6.3 per cent, well below the income the market is demanding from British Gas, for example, is hardly over-generous. But all is not gloom: having drifted for four years, and after a particul- arly weak last three months, the shares are starting to look attractive again.

As long as BT can manage the decline of its core residential business, other areas offer exciting growth potential. Cellnet, for example, saw 360,000 new subscribers added to its network in the six-month period, bringing the total to over 2 million. Mobile telecoms turnover grew by 38 per cent to pounds 410m. Business exchange lines also continued to grow, and other services, including the Yellow Pages, moved smartly ahead.

The changes sweeping through the telecommunications industry are so fast and far-reaching that nobody can do more than guess what the sector will look like in five or 10 years. But if any company can capitalise on developments in mobile telephony and multi-media, BT with its rock-solid finances and market dominance is it. Along the way, if it can more or less guarantee dividends growing at almost twice the current rate of inflation, its shares, up 7.5p to 371.5p, should be well underpinned.

Concerns hang on at Burton

Burton has come a long way since the dark days of 1991, when it reported a thumping pounds 185m loss after a bucketload of exceptionals. Since then the shares have zoomed from 30p to 110p, up another 5p yesterday. Burton is starting to look more and more like a credible retailer.

Yesterday's results were further reward for chief executive John Hoerner's strategy of moving the stores away from permanent discounts to a policy of selling "prime" - meaning full price. This has limited sales growth but improved the margin, which increased by 3.7 percentage points last year.

Given recent figures from M&S, Burton's current trading looks encouraging, with a 4.4 per cent increase in the nine weeks since September. Like other retailers, Burton is reducing its supplier base and forging closer links with those it keeps. Stores are also being refurbished at a rate of knots.

A recurring concern is that the group remains over-reliant on Debenhams. Of the group's pounds 102m retail profit last year, Debenhams contributed pounds 82m. The chain stores, which include 1,300 shops in half a dozen formats, returned a profit of only pounds 20m on sales of pounds 1.8bn, a miserable return of just over 1 per cent.

To be fair, many of these are heading in the right direction. Burton Menswear reduced losses and the Top Shop/Top Man chain bounced from loss to profit. But Dorothy Perkins still seems to be struggling despite an expensive re-fit and heavier advertising.

Analysts are forecasting profits of pounds 113m this year, which puts the shares on a forward rating of 18. With the shares already up 50 per cent this year and concern that rival retailers might destabilise Burton's margins strategy by cutting prices, that is too high.

Ladbroke hit by

betting shortfall

Peter George has done little for shareholders in Ladbroke since he took over at the Hilton hotels to betting group at the start of 1994. The shares hit a high of around 212p as the market welcomed the end of the Cyril Stein era, but after yesterday's 23p fall to 131p they are just 1p off their five-year low.

The ingredients of the latest profit warning are hardly a surprise. Ever since National Lottery scratch cards were launched in March, Ladbroke and rival gaming operators have been complaining bitterly about their impact on small-stake betting. The hot weather has also been a common theme. Fields have shortened as owners and trainers, fearing for the well- being of their thoroughbreds on hard race tracks, have withdrawn horses. That has made the odds-on races tighter, cutting punters' enjoyment and whittling away at the bookies' margins.

Nothing new there. What has come as a shock to the market is the extent of the problems. They have clearly become so large in the third quarter that, barring a dramatic reversal in the rest of the year, the shortfall in betting and gaming will now more than offset continued growth from hotels.

Indeed it looks as if betting and gaming will be barely profitable in the second half of 1995, leading analysts to slash forecasts by around pounds 20m yesterday. Profits of pounds 120m this year, pounds 8.5m below last year's "normalised" result, would put the shares on a prospective p/e of 19, dropping to 15 if Ladbroke manages pounds 150m in 1996.

That looks a full valuation for a group which appears to be suffering more than its larger rivals, and in the absence of the long-awaited deal to reunite Hilton with the US group of the same name, it is hard to see the shares moving far.

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