The Investment Column: Greenalls now so slimmed down that it may be sitting pretty for a takeover bid

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The Independent Online
GREENALLS GROUP, the owner of De Vere hotels, has undergone a radical transformation over the past year, shedding businesses with almost indecent haste in a bid to become a focused hotels and health- clubs operator. The result, at first sight, is a group that is not so much slimmed down as anorexic.

With 800 pubs sold to Scottish & Newcastle for pounds 1bn in September, and its tenanted pubs division shunted off to Nomura, all Greenalls has left is a string of leisure assets. The portfolio comprises 17 De Vere luxury hotels, 10 Village hotels-cum-fitness clubs and Greens, the group's fledgling health-club operator.

A quick glance at the group's full-year results, posted yesterday, shows the decision was right in theory. The company reported a 36 per cent fall in profits, with the results clouded by slow growth in its recently sold pubs and restaurants division and a loss at the Tavern drinks wholesale business.

Yields at De Vere hotels are outperforming other operators in the four- star sector, including the Whitbread-run Marriot chain. And like-for-like room yields in the first nine weeks of the group's new financial year are up 3.3 per cent at De Vere and 3.6 per cent at the Village outlets.

Paul Dermody, Greenalls' chief executive designate, has set aside pounds 76m for investment in the new group this year. Of this pounds 30m will be ploughed into Greens, which currently has just one club. Mr Dermody plans to roll out about six new clubs a year, with 18 projected by 2002. A further pounds 27m will be spent on refurbishing key properties in the De Vere chain with the remainder earmarked for the Village chain.

But despite Mr Dermody's determination to remain independent, Greenalls looks like a sitting duck with Whitbread a possible predator. Greenalls' shares have fallen about 20 per cent this year and shaded a further 0.25p to 258p yesterday.

Assuming current year profits of pounds 39m, that puts the stock on a forward multiple of 13.6. Worth holding for the special dividends but not worth chasing.

Carpetright

IT HAS been a good year for Carpetright, the out-of-town retail group run by the irrepressible Lord Harris. The shares have almost trebled, it has grabbed two percentage points more of the UK carpet market, and it has managed to take advantage of the problems at rival Allied Carpets, which was recently taken over.

Yesterday's half-year results underlined the trend. Profits were up 40 per cent to pounds 16.2m on sales up just 12 per cent. Like-for-like sales were up by a creditable 5.5 per cent in the period and by a thumping 15.5 per cent in the past six weeks, though Lord Harris admits this is not sustainable.

The trick has been to reign back on new store openings, concentrating instead on developing the stores it already has. Costs have been controlled and margins are up by 1.8 percentage points.

The improving housing market has helped though the real boost will come from increased housing transactions, which are only just starting to filter through. All this has helped push Carpetright's share of the UK carpet market to 17 per cent compared with Allied Carpets' 12 per cent.

Lord Harris was slightly caught out by the trend to hardwood floorings a year or so ago but has studied the market and hopes to have wood-floor offerings in 150 stores soon.

Further out, a new service, Harris Carpets Direct, is scheduled to be launched next year. This will take carpet samples to customers' homes and offer price guarantees. The initial investment is pounds 1m for a London- based service.

With capital expenditure falling elsewhere, there could be a cash pile of pounds 20m by the year end. The prospects for progressive dividend growth are therefore good, though Lord Harris has ruled out special payments.

On Investec Henderson Crosthwaite's full-year profits forecast of pounds 35m, the shares, up 29.5p to 453.5p yesterday, trade on a forward multiple of 17. With a solid yield of over 4 per cent they are still worth tucking away.

Berkeley

BERKELEY GROUP, the housebuilder and property developer, has proved itself a class act over the years. A shrewd land buyer, its schemes are also in tune with the urban regeneration agenda of the Government. No less than 88 per cent of its plots for future development are on brownfield sites or urban land. So although the sector is depressed, Berkeley's shares have maintained their relative premium to other housebuilders.

Yesterday's results were slightly ahead of forecasts with pre-tax profits for the half year to October up 15 per cent to pounds 60.3m. More surprising was the contribution from commercial property activities, up from pounds 5.3m to pounds 16.8m, with housing profits down for the first half. The core housing division is left with a lot to do in the second half to meet expectations, but the company and the market are confident that it will pull this off.

However, Berkeley is concerned about escalating labour costs in the sector and it is very exposed to the London and southern housing market, which are currently booming but will, presumably, run out of steam at some point. Already, the average selling price of Berkeley homes is pounds 252,000.

Current year profits forecasts are being revised upwards with Peel Hunt going for a top of the range pounds 135m, or 75p a share. With the shares down a penny at 709p yesterday, they trade on a forward multiple of 9. With the sector trading on a rating of about 7 there are undoubtedly cheaper housing stocks around, but for a quality operator this still seems good value. Buy.

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