THE INVESTMENT COLUMN: BET's problem is its portfolio

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The Independent Online
It has been a long, painful process but BET seems to be emerging from the crisis of the early 1990s in reasonable shape. After three years in intensive care and the last 12 months at the physio, yesterday's pounds 70m acquisition of Style showed the business services combine is now ready to put some muscle on again.

Full-year figures show the rehabilitation process is far from complete, however. Underlying pre-tax profits up 22 per cent to pounds 111m were at the top end of expectations but they showed a worrying dependence on the impressive recovery in the plant hire business, which anyway was from a low base.

The other three core divisions - laundry, distribution and a range of general business services, including cleaning, security and catering - had to run extremely hard just to stand still.

Cost-cutting and productivity is still the order of the day, with turnover and margin growth looking as far away as ever.

The final dividend of 2.8p makes a welcome 23 per cent increase in the full-year payout to 4p, but as the chart shows the dividend still has a lot of catching up to do.

BET's problem is that no one would really have chosen the portfolio of businesses it is trying to knock into shape. It would be hard to envisage a more complete grouping of low-margin, competitive trades with such low barriers to entry.

NFC's travails have proved that customers are too sophisticated now to pay through the nose simply to avoid having to ship their own goods from A to B. And cleaning airport loos and washing towels is never going to be other than a commodity business.

That does not mean that big companies, with appropriate economies of scale, cannot make money doing it, but only the most ruthlessly efficient can hope to stand out from the crowd. Fortunately, BET seems to be doing the right things and an 83 per cent jump in turnover from the schools catering business is encouraging.

What matters now is the extent to which the reshaping of the company can be accelerated. It still needs to get rid of its low-margin turnover businesses and to buy in more growth operations.

Doing so without stretching the balance sheet as it did in the late 1980s will be a serious challenge and the problems BET faces in buying sustainable, secure growth mean Kleinwort Benson's forecasts of only modest growth to pounds 132m this year and pounds 150m next time look realistic.

The prospective p/e of 12.5 falling to 11 implied by those figures is not demanding. But until the company proves it can handle growth as well as recovery it is fair value.

Brighter future

awaits Babcock

Slightly disappointing they may have been, but Babcock's results should not distract attention from what is still a pretty bright long- term outlook.

Pre-tax profits of pounds 7.8m, rebounding from a pounds 41.2m loss, were a couple of million pounds short of expectations, which explained why the share price remained flat at 30p yesterday. But there was more to be positive about than its return to the dividend list with a token payment of 0.4p, the first since 1992.

Despite one or two hiccups, including extra costs incurred on the Fushun power station project, the restructuring is going well, and with several decent contracts on the horizon there are indications that growth in profits and dividends is sustainable.

The energy division, which accounts for under a third of the pounds 755m turnover, cut its losses from pounds 54.3m to pounds 11.2m and should return to profit in the second half of the current financial year.

A pounds 200m power station contract in China has been signed, and other deals are under tender.

Rosyth Dockyard, which Babcock runs, has a secure stream of re-fit work on Ministry of Defence warships and it is possible that the yard will obtain contracts to work on submarines as well. The company said negotiations to buy the yard (it is the only bidder) should be completed within the year.

Babcock is also in the running for the contract to run Portsmouth naval base, though it faces stiff competition from Vosper Thornycroft, the warship builder. The facilities management division, which runs Rosyth, was Babcock's most profitable operation, making pounds 11m. Profits at the materials handling division were not as good, down about pounds 1m to pounds 6.5m, but a lot of one-off costs have been incurred to restructure the operation. With the order book up 45 per cent and sales up pounds 30m to pounds 170.7m, the signs are that this division's contribution to profits is still to come.

Last year was always going to be a transition period for Babcock, but the company appears to have come through relatively safely. Smith New Court is forecasting pre-tax profits of pounds 20m in the current year, with pounds 30m in the year to March 1997 and pounds 40m after that.

With profits seemingly back on a growth tack, a prospective price-earnings ratio of 15 is not asking too much even if the planned five-for-one share consolidation will beef up the price and (albeit illogically) hold the shares back in the short run.

TLG lights up higher profits

Shares in TLG, the lighting business spun off from Thorn EMI last November, have had a strong run, rising a third in the six months since flotation against a flat market overall. They provided further evidence that the safest new issues tend to be the unwanted but conservatively priced progeny of big companies, which have too much face to lose to risk a flop.

Yesterday's 30 per cent rise in ongoing pre-tax profits from pounds 20.4m to pounds 26.6m was in line with expectations but the shares slipped 12p to 149p as the implications of the proposed sale by Thorn of 50 million shares - on the first day it was permitted to do so - sank in.

There would not appear to be too much wrong with TLG's underlying performance, with the profits struck from a healthy 8 per cent increase in sales, as economies across Europe recovered from recession, and a nice jump in operating margin from 6.2 per cent to 7.5 per cent.

The company is also safe enough, with the pounds 77m proceeds of last year's market debut all but wiping out gearing and strong cash flow likely to do so this year.

But the share price decline also reflected concerns that TLG's premium rating was at odds with the evidence of a squeeze on margins from higher raw material prices and continuing pressure on selling prices.

So far these effects have been tackled - in the UK a 5 per cent price rise caused few problems, while higher input costs have been offset by better purchasing and cheaper designs - but, combined with the expansion of the company's share capital after last year's float, they point to less than exciting earnings growth in the short term.

The return on sales from the European operation is still way behind that achieved in the UK and, with construction activity in Germany still falling and the southern countries under pressure, it will not catch up soon.

With the share issue over three times subscribed last year, it is no surprise that the shares outpaced the market so handsomely in the early months. But on a prospective p/e of 14, even after yesterday's retreat, Thorn looks right to take its profit now.