The Investment Column: First Leisure sheds its fat to focus on health clubs

LOSING WEIGHT is harder than putting it on, but First Leisure, the health clubs to bowling alleys group run by Michael Grade, finds it easier to lose shareholder value than add it.

The shares plummeted last year from 436.5p to a low of 160.5p in October. It has taken the last nine months for them to crawl back up to 228p.

The City has tipped the group as a takeover target, pointing to the value of breaking up the group's divisions, health clubs, family entertainment and nightclubs. Now First Leisure is breaking itself up to focus on health clubs. There's a good precedent for the move. Cannons, the former Vardon group, has enjoyed a 50 per cent rise in its shares since December when it announced disposals and a new focus on health clubs.

In the short-term, First Leisure's plan means there could be some positive newsflow if Mr Grade achieves good prices in forthcoming deals.

Family entertainment will be the first to go, thought to be worth pounds 90- pounds 115m. Formal offers are already on the table. Possible bidders include Whitbread and Allied Leisure.

Less clear is the future for the nightclubs, which are to be merged, demerged or sold. In the meantime, it could be a drag on earnings. Interim profits this year fell 30 per cent to pounds 9m.

First Leisure says there are no benefits in centralising the administration for the nightclubs and healthclubs; separating the two will also make their value more transparent.

This does not amount to a long-term strategy, however and First Leisure believes that the way forward is to focus on "rich families".

Its Esporta health clubs are at the upper end of the market, and it claims it can fight off the likes of David Lloyd by offering children's food in its restaurants and sports coaching for the under fives. But by placing a premium on customer service, costs will be high.

Health's profits are tiny - just pounds 4.4m this year. First Leisure aims to double the number of clubs, mainly organically, to 44 in the next four years, at a cost of around pounds 150m.

Strategies based on market positioning are rarely sustainable, as Ratners learnt painfully down at the lower end of a different market. Analysts expect pre-tax profit of around pounds 33m and earnings of 15.6p per share this year. Although holders of the shares can expect some uplift upon the completion of disposals, there seems little reason to buy.

Lonrho Africa

MARK NEWMAN, Lonrho Africa's chief executive, urged Lonrho shareholders not to sell their shares in Lonrho Africa when it was demerged from Lonrho last year. Their reward has been a 50 per cent fall in the price to 48p. The question is whether the shares could halve again.

One worry attending Lonrho Africa's flotation was Africa's economic and political unpredictability. Offsetting this was the group's claim it had competitive advantage through experienced management who could tap the vast continent's commercial potential.

One year on, the group is redefining itself after the arrival on the board of Richard Wilkinson, from principal shareholder Blakeney. It is slimming into a focused African distributor of motor parts and food. The cotton and hotels interests are to be sold and the timber business will be floated on the Zimbabwe stock exchange.

Mr Newman says henceforth the company will be a "price maker" rather than a "price taker", but investors will wonder why this strategy wasn't the one pursued at the outset. War in Angola and an overstatement of Nigerian assets - "more error than fraud" the group says - have confirmed fears over the inherent riskiness of the group.

A pounds 13m exceptional charge sent Lonrho Africa pounds 4.9m into the red yesterday The interim dividend was passed and the group says that the economic environment has worsened since it last reported.

The cotton businesses are being sold at the bottom of the cycle and the hotels businesses have been hit by a slump in tourism. Getting good prices will be hard. However, some analysts say there will be a queue of buyers hoping to pick up trophy assets, such as the Nairobi Norfolk Hotel, which will shine when the cotton price picks up and tourists return. But the group has solid commercial relationships in several African states and at 47.5p the shares are worth holding.

Hogg Robinson

THERE ARE few better examples of the market's failure to recognise a good small-cap stock than Hogg Robinson.

The outsourcing and business travel group has come through what was meant to be one of its worst years. But last year sales grew 22 per cent to pounds 1.82bn and earnings per share rose 6 per cent. So why did the shares fall yesterday?

Because two thirds of its earnings come from the travel trade, the market assumes that Hogg's earnings will fluctuate with ticket sales. Last autumn, the shares bombed amid fears over the global economic collapse. There was no deep crisis, but Hogg's shares continue to launguish at a discount to the small-cap indices and a 68 per cent discount to the support services sector.

Hogg's problem is the mistaken view that it is a business travel group rather than a support services group.

In fact, Hogg's earnings are not so dependent on short-term economic factors. Its business travel division is increasingly shifting from volatile commission to fees. Half its earnings come not from day-to-day ticketing, but from integrated travel arrangements. These are often stable, long- term, contracts.

David Radcliffe, Hogg Robinson's chief executive, has also shunted the group into other forms of outsourcing, such as benefits and payroll services. But he gets no credit from the market. The shares closed down 2.5p at 220p yesterday, putting them on a forward p/e of just 9 - against 20 for other support services.

The market could soon wake up to the new nature of Hogg's business. If it fails to, the group may go private. Either way, the shares are a buy.

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