THE INVESTMENT COLUMN

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The Independent Online
GUS faces problems of success

Great Universal Stores has been increasing profits every year for almost half a century now - the year to March was the 47th successive increase - so it is perhaps churlish to complain. But after the enfranchisement of the non-voting stock and the payment of a special dividend four months ago, the market's high expectations were almost bound to be disappointed and the shares fell 8p to 613p.

Gussies has a problem many companies would die for - it simply cannot find sensible things to do with its prodigious cash-flow. Even after March's 30p special payment, costing pounds 300m, and a 15 per cent rise in the underlying dividend to 15p, the company's cash mountain still tops pounds 1bn, a sixth of its total market value.

With current interest rates so low, shareholders are right to complain that they don't need to pay someone else to put their money in the bank for them. GUS has been saying for years that it will spend the money when the right acquisition comes along and for years it hasn't. The time has come to think more seriously about giving the surplus back to its owners and letting them think what to do with it.

That perennial complaint aside, it should not be forgotten that GUS has been a fantastic investment over the years. The shares are worth 25 times as much as they were 25 years ago, during which period they have performed twice as well as the market as a whole.

Figures for the year to March, showing profits 8 per cent ahead to pounds 561m (12 per cent better after stripping out the paltry return on the cash pile), confirmed the underlying strength of the business. GUS dominates the UK catalogue shopping market and so enjoys a healthy operating margin of close to 11 per cent, it has a strong collection of brands, including Burberry, controls its working capital admirably well and spits out cash.

Profits grew strongly in all five divisions - GUS is a big supplier of consumer and corporate finance and one of the country's largest property companies with 1,100 investment properties worth more than pounds 850m. South African retailing also performed well, new stores were opened and further expansion is pencilled in for this year.

Following the enfranchisement of the shares, which increased GUS's market value by 50 per cent in 1993, the stock has done nothing, albeit against the background of a flagging retail sector.

On the basis of profits of about pounds 600m this year and pounds 650m next time, the shares stand on a prospective p/e of 15, falling to 14. The historic dividend of 3.0 per cent already discounts the prospect of above-average growth in the payout and the shares are fairly priced.

Greene King

sharpens its act

The recovery at Greene King, the regional brewer hit first and far harder than its contemporaries by the property crash, is well under way and the company's profits record no longer looks as flat as its East Anglian heartland.

Encouragingly, better trading is not only the product of an improving economic climate in East Anglia and the South-east, but also reflects more effective management. Greene, which once neglected its managed and tenanted pubs in favour of its brewing business, has sharpened up considerably on its retailing skills.

Yesterday's announcement of a 4 per cent rise in pre-tax profits to pounds 21.4m for the year to 30 April does not reflect the full trading picture. The underlying rise in trading profits was 10 per cent to pounds 30.1m after stripping out pounds 2.8m of reorganisation costs, additional pension contributions and a one-off extra provision for bad debts.

This underlying growth is mainly attributable to better churning of the pub estate, particularly in knocking smaller tenancies out of the system, buying larger, managed houses, and plugging into the growth in the eating- out market.

Making acquisitions is now a choice rather than a dream with the balance sheet free of the Morland shares acquired during Greene's abortive bid for its Oxfordshire neighbour a couple of years ago.

The disposal of those shares was the driving force behind a drop in gearing from 38 to 26 per cent.

The continuing recovery should see this year's profits rise to pounds 23.3m and earnings per share increase from 39.3p to 40.3p. On the face of it, that is fully reflected in the share price, up 6p to 554p. But if Scottish & Newcastle's bid for Courage is cleared by the DTI, a further wave of takeover speculation could boost the sector.

Both Whitbread and Bass could be interested in Greene's brewing operation and the shares should be held for that.

Canadian buy aids First Choice

New management has worked wonders at First Choice Holidays, the UK's third-biggest travel agent. Formerly Owners Abroad, it faced a severe credibility problem two years ago when it issued a profits warning immediately after fighting off a bid from its rival Airtours.

The streamlined brand portfolio launched by new chief executive Francis Baron last year has taken the group's market share 2.5 points ahead to 14.3 per cent, where it is now snapping at the heels of its former nemesis.

For the coming winter season the improvement is even more dramatic: bookings are running at double the level of last year and market share has soared from 5.3 to 15 per cent.

Profits are also benefiting from the Francis Baron treatment. Yesterday, First Choice reported that the first-half loss traditional to the travel industry had been cut from pounds 28.7m to pounds 23.8m in the six months to April. The main improvement stems from including the first full six months as a subsidiary of Canadian market leader ITH, previously a minority investment. Bought to reduce the cyclical fortunes of the business, ITH chipped in pounds 7.9m against pounds 2.6m for the previous part-period.

Cost cuts from last year's redundancies are also coming through in full, and the revamped First Choice is going to find the going tough. May and June have been some of the worst months the market has seen for years, so shareholders must hope Mr Baron is right to forecast more stable prices for the rest of the season. The "feel-bad" factor remains the dominant influence on holidaymakers and brokers were busy slashing profits forecasts yesterday. On Smith New Court's figure of pounds 25m for the current year, the shares, down 3p at 103p, stand on a forward multiple of 14. Worth holding to see if a 21 per cent stake controlled by Westdeutsche Landesbank finds its way to a bidder.

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