THE INVESTMENT COLUMN

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British Gas looks past its woes

So many things have gone wrong for British Gas this year that it is beginning to look like an orchestrated campaign. But it has been at some cost to British Gas shares, which have slumped from a January high of 316.5p to yesterday's 243p, up 2.5p on the day.

The company has suffered a haemorrhage in market share in its industrial and commercial markets. From close to 60 per cent last year, it now commands less than 35 per cent of the market. Prices have tumbled on the back of the current UK gas surplus. The problem has been exacerbated for British Gas by its long-term "take-or-pay" contracts. These could result in it paying pounds 520m this year for gas it has not used but is still forced to pay for.

To add to this litany of woes, the company has now warned that this year's spell of fine weather will push full-year earnings below last year's level. The cost to operating profits so far in 1995 has already been pounds 120m and with a further pounds 83m provision for take-or-pay pre-payments, the company did well to hold the fall in nine-month profits to pounds 103m, leaving the pre-tax total at pounds 721m.

Despite all this blood and gore, British Gas remains confident enough of its future to confirm its intention to hold this year's dividend at last year's level of 14.5p. It is difficult to avoid the feeling that some of the problems are being overplayed by the company as a negotiating stance ahead of the review by its regulator, Ofgas, of the price formula for TransCo, the newly segregated gas pipeline and storage business. What Ofgas decides could have a dramatic impact on the value of the company, with one analyst estimating that a negative outcome would be equivalent to slicing pounds 1bn off revenues over the three years to 1997.

Meanwhile, cost savings from the 1993 restructuring plan - now expected to be pounds 200m this year - are merely offsetting the erosion of the company's business and commercial market share. To keep moving ahead, British Gas will need to find further savings when the domestic market is opened to competition later in the decade.

The political game could have further to go. One possibility is that the company could raise the stakes further with the regulator and the politicians by threatening to walk away from its onerous gas contracts. But while those contracts remain, they are a big obstacle to demerger plans, which management are now thought to see as a way of unlocking shareholder value. Meanwhile, investors can expect underlying profits of close to pounds 970m this year, putting the shares on a prospective multiple of 11. With a yield of 7.5 per cent, they are worth holding.

Unigate sale

opens new doors

For a company that has shed more than its fair share of tears over the spillages of the new Milk Marque regime, Unigate was remarkably quiet on the issue yesterday. This was in spite of a fall in the company's dairy profits from pounds 18.5m to pounds 16.5m and an acceleration in the decline of doorstep milk deliveries, which still account for 40 per cent of Unigate's milk business. Management did not even bleat too loudly about supermarket pressure on margins, or the weather.

In a year that has seen a summer heatwave turn into a winter of discontent for many food companies, this was an impressively upbeat performance. The 12.5 per cent hike in half-year profits to pounds 60m will have helped management's mood. But the other key reason for the company's spirited stance is that a diversification away from the troubled milk sector is looking ever more achievable.

Over the past five years Unigate has been divesting core businesses, such as car dealerships and animal feed, to concentrate solely on its food and distribution businesses. Giltspur, the American exhibitions business was sold for pounds 40m last month. And the poorly-performing US restaurants business, which includes the Black-Eye Pea and Taco Bueno chains, is also up for sale, even if its recent performance, which saw profits halve from pounds 6m to pounds 3m in the half-year, hardly makes it an attractive prospect.

But the big step forward was yesterday's decision to sell its 29 per cent stake in Nutricia. Having watched its value double to an estimated pounds 329m, Unigate has decided that now is the time to realise the value and put the cash to better use. The proceeds will wipe out Unigate's debts and give it the funds to buy more businesses in its two main sectors.

Hazelwood Foods has long been mentioned as a target when the Nutricia stake was sold. Tibbet & Britten, the distribution group is another possibility. After plunging to 210p three years ago, Unigate shares have enjoyed a good run since and closed 7p higher yesterday at 432p. On a forward rating of 12 they still look undervalued.

Euro Disney riding for a fall

Euro Disney's shares lost a tenth of their value yesterday, falling 21p to 194p, but it is not clear how the market arrives at even that lowly valuation. Despite the turnaround from losses of Ffr1.8bn (pounds 245m) to a Ffr2m profit in the year to September, the company still has a financial mountain to climb.

Euro Disney's accounts are an accounting mirage. It would be wallowing knee-deep in red ink without goodwill from banks, which granted a holiday on annual interest payments totalling Ffr600m, and Disney's waiver on management fees and royalties.

From next year, the financial props will start to be removed, and it would take a brave investor to bet Euro Disney will be capable of standing on its own feet. Just to cover the increase in interest costs of Ffr470m by 1998, and the start of royalty and management payments to Disney in 1999, the theme park, tour operations and hotels will have to raise revenues by at least 5 per cent each year.

Boosting footfall through the gate might be achievable, but raising spending on food, drinks and merchandise will prove a bigger challenge. Gate receipts only account for 25 per cent of total revenues. The currency markets aren't helping much, either. A devaluation of the French franc would make a world of difference, in particular for the British, who have easy access to France but can't afford to go.

The rollercoaster ride of Eurodisney's shares over the years makes the white-knuckle experience of the park's Space Mountain pale. It is showing no sign of slowing, with the venture's finances looking as vulnerable as ever.

The banks have already lumbered themselves with 15 per cent of the shares by swapping debt for equity, and would almost certainly strongly resist accumulating more paper given that Euro Disney still plans to build a second park and will knock on their doors for development funds. Other investors should tread as warily.

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