THE INVESTMENT COLUMN

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The Independent Online
When acquisitions make better BET

BET's shareholders have seen scant reward for their patience since John Clark, chief executive, started his shake-up of the sprawling towel hire to distribution conglomerate in April 1991. After initial enthusiasm, the intervening period has seen the shares underperform the rest of the stock market by 46 per cent, despite a crash diet to rectify the excesses of a 1980s spending binge. Now BET has returned to the acquisition trail, investors must hope sentiment will improve.

Yesterday's interims represented a good start. "Clean" pre-tax profits ahead of a small net loss on disposals climbed 26 per cent to pounds 65.9m, well ahead of expectations, hence a 3.5p rise in the share price to 129.5p yesterday. Inflated by the pounds 86m spent on acquisitions so far this year, gearing has jumped to 38 per cent from 6 per cent in September. But worries about this new rise in debt look wide of the mark. Three-quarters of the planned acquisition programme for this year is complete and further disposals should see gearing back down to around 25 per cent by year-end.

The good news in the figures came in group margins raised a full point to 7.6 per cent. Cost-cutting has helped, but there were also encouraging signs that BET is managing to push through modest price rises in certain areas.

One of them, US plant hire, has been buoyant for some time. It chipped in pounds 16.6m of the pounds 27m operating contribution from plant services, up 29 per cent on the comparable period. BET believes there are two more years of growth to come in the US, while diversification away from UK construction should help protect it here.

Management's confidence about US distribution, another area where BET saw price increases, may be less well placed, given the cyclicality of the chemical industry. Deregulation and lower demand from chemical companies in the US pulled the divisional result down from pounds 15.7m to pounds 12m, the only one of BET's four business groups to report lower profits.

Mr Clark's aim of eventually dragging margins into double figures would be buttressed by a few more acquisitions like Style, the conference and training business for which BET paid pounds 70m earlier this year. It chipped in pounds 3.3m to operating profits, a 34 per cent return on sales. But the group remains lumbered with some pretty low-margin operations like office cleaning and still needs to build dominance in certain areas.

Profits of pounds 135m in the full year would put the shares on a sub-market prospective multiple of 12. Backed by a forward yield of perhaps 4.8 per cent, they look reasonable value, if dull. Mr Clark still has a way to go to establish a rating akin to rival Rentokil, which has outperformed the market by over 90 per cent during his tenure at BET.

Cheers not tears for Whitbread

Many a company has tried to diversify away from a dull core business, but for most the move into unfamiliar areas ends in tears. Not so Whitbread, the former brewer, for whom traditional beer sales contributed less than a fifth of group operating profits in the six months to August.

Whitbread has successfully made the transition from brewing beer to becoming a fully fledged leisure company. Managed pubs, which include the Brewers Fayre brand, are still the biggest profit earner, but the addition of the recently acquired Marriott hotels and David Lloyd Leisure company will soon push restaurants and leisure into the top slot. The success of the strategic shift was underlined in interim profits which showed impressive mid-teens growth from managed pubs, restaurants and hotels, more than making up for only flat profits from tenancies and beer sales as vicious price competition in the off-trade continued. Pre-tax profits climbed 9 per cent to pounds 155.7m (pounds 143.1m), allowing an 8 per cent dividend increase to 5.75p (5.35p).

Those figures were right at the top end of expectations and Whitbread's shares moved accordingly, closing 9p higher at 629p as the market took the view that the company's financial strength, cash generation and strong brands merited a premium rating.

Certainly pushing sales 8.5 per cent ahead against a backdrop of extreme consumer caution was an impressive performance. The managed pubs managed 11 per cent turnover growth compared with a 7 per cent average for the sector, beer volumes were up 3 per cent while the on-trade as a whole fell. Whitbread's market share rose from 13.2 per cent to 13.9 per cent and the improvement in hotel room yields was noticeably better than the competition.

Encouragingly, heavy capital expenditure, at a rate of almost four times depreciation, continues to provide new profit streams for the future. Stripping out that growth spend and the cost of buying new businesses, underlying cashflow in the half was a useful pounds 58m, about the same as last year.

Profit forecasts of pounds 282m for the year to February 1996 and pounds 315m the following year, put the shares on a prospective price/earnings ratio of 15 falling to 13. Whitbread won't set a portfolio alight, but as an extremely well-managed company with increasingly strong market positions it is a very safe investment.

Betterware

turns the corner

Betterware, the door-to-door sales group, has recovered a modicum of its former poise this year following last year's problems. Those saw 1994 profits crash from pounds 14.1m to just pounds 1m, including a pounds 5.1m exceptional charge.

Chairman Andrew Cohen's confidence in April that the company had seen the worst seems to have been borne out by yesterday's interim figures. Pre-tax profits crept ahead from pounds 3.97m to pounds 4.08m in the 28 weeks to 9 September, with the half-way dividend held at 0.85p. Although unexciting, the news suggests that Better- ware has turned the corner.

The chief problem last time was the loss of over 1,000 part-time door- to-door sales staff following the calamitous start of a new Birmingham warehouse in 1994. At 10,000, the sales army is still well short of its peak of 11,500, but Mr Cohen says they only need to recruit another 500 to regain last year's lost ground. Meanwhile, single-digit percentage growth in the UK in the first eight weeks of the second half give grounds for optimism about the full year.

A further lift to future results would come from completion of current negotations to dispose of the three non-core businesses - principally the Geeco garden products subsidiary. Removal of the loss-makers, which saw their combined deficit mount from pounds 405,000 to pounds 475,000 in the half- year, would give an immediate bounce to profits and add to Betterware's cash pile of close to pounds 8m. But any real excitement is likely to come from Europe. France saw sales and profits rise 40 per cent and accounts for 10 per cent of the group, although activities in Spain and Germany have been put on the back-burner.

Full-year profits of pounds 8m or so would put the shares at 65p, down 0.5p, on a prospective multiple of 13. Despite the improving trading outlook, sentiment remains against Betterware after past disappointments and the shares look fully valued for now.

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