The Investment Column: Overvalued radio may curb bids

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The Independent Online
Judging by the premium prices commanded by the radio sector's consitutuent companies, GWR's bid for rival Chiltern, which has its first close today, is just the start of the bid action.

The government White Paper on media cross-ownership got the ball rolling earlier this summer, sending companies such as Metro, Chiltern and Scottish sharply higher on the expectation that bigger players - the likes of Capital or GWR - would take advantage of a relaxation of the cap on licences to expand their empires.

To date, only GWR has obliged. Barring a last-minute counter-offer from a white knight, Chiltern looks likely to succumb to GWR's share-exchange offer later today.

No other action seems imminent, despite persistent market rumours about a bid being prepared for Metro.

The problem may be that shares in the relatively small publicly quoted radio sector are already too highly valued. Scottish Radio is trading at 306p, up from 223p a year ago. Capital went from 380p in April to a high of 459p in May, dropping slightly to about 436p recently. Metro continues to be the star performer, rising from 396p in April to 554p by yesterday's close.

Most analysts who cover small-capitalisation stocks say the market has already factored in the effects of the Government's rule changes. Likewise, the buoyant market for advertising on commercial radio is already fully reflected, and then some, in the current share price of possible bid targets.

In the case of Metro, the shares are trading at an extremely demanding 30 times likely 1995 earnings, an especially high rating given the industry's notorious cyclical swings.

There are precious few bidders around with the kind of financial muscle to buy at these prices. Aside from a handful of overseas companies, led by CLT of Luxembourg, most of the richer potential bidders are also still restrained by ownership limits.

More intriguing, perhaps, is what the newspaper publishers with radio interests are likely to do once they are free to expand more robustly into commercial radio. The arrival on the bid scene of companies such as Daily Mail and General Trust and Emap could really get the sector going. Then, today's predators like GWR could become prey themselves. Such a scenario must await the Government's primary legislation on media cross- ownership. Meanwhile, consolidation is likely to be on the scale of GWR's bid for Chiltern; interesting, but hardly earth-shattering.

Triplex Lloyd charges ahead

The turnaround at Triplex Lloyd, the former West Midlands metal basher, is all the more remarkable for having been led by the same chairman, Colin Cooke, who presided over the group's recent problems.

Now stepping down to the non-executive chair, Mr Cooke can congratulate himself on his achievements.

Pre-tax losses of pounds 2.92m in 1994 have turned into profits of pounds 8.31m in the year to March, although the figures were complicated by the continuing programme to dispose of peripheral businesses and loss-makers.

The sale in February last year of the ED Hinchliffe curtain walling operation was the main one, eliminating trading and disposal losses totalling pounds 7.05m.

That sale, as well as tighter housekeeping, have returned the engineering division to profit and brought its planned sale closer.

Elsewhere, a slippage in margins to 5.4 per cent in the power division last year has already been addressed. The Firth Vickers subsidiary has returned to break-even after a pounds 600,000 first-half loss and two other underperformers were disposed of in November.

The recovery means that double-digit margins are a real prospect in Power, the precision castings business, this year, taking profits to above pounds 8m from last year's pounds 4.4m.

Automotive, up 46 per cent at the operating level, should continue to power ahead on the back of demand for its turbocharger components. Still a feature on only 40 per cent of diesel engines, turbochargers should be a standard item by the end of the decade.

The group's capital expenditure budget of nearly pounds 10m this year should be more than covered by cash flow boosted by two Birmingham property developments due to start producing income soon.

NatWest Securities' forecast of pounds 10.7m profits before property gains puts the shares, up 8p at 162p, on a forward multiple of 14. Good value.

Phonelink dials

the right number

You really have to admire Phonelink's chutzpah, calling on shareholders for a further pounds 7m at the end of a 15-month slide in the share price from 438p to 227p. News of the cash call, and further losses in the year to March, pushed them down another 7p to 220p.

Not that shareholders in the on-line information supplier are likely to be too fazed by yesterday's announcement. Anyone who has owned Phonelink's shares since flotation in 1993 is still nicely ahead of their debut price of 155p and anyone still owning them does so because they believe in the company's long-term potential.

It is a fairly compelling story. The market for the sort of business information Phonelink provides through its Tel-me service - train timetables, hotel reservations, travel and weather information - is forecast to grow strongly over the next few years and Phonelink has a good lead over the competition. It also seems to have made the realisation that having created a good product it is now in the business of marketing rather than computer technology.

Slashing initial costs and relying more on on-going use charges should give a fillip to the so far rather disappointing rate of take-up. The one-for-eight rights issue at 170p will keep Phonelink in working capital for at least a year - net cash at the year-end was pounds 2.8m. But with a loss before tax of pounds 3.7m (up from pounds 1.76m) during the year those funds plainly won't last long.

In a sense the figures are an irrelevance. Phonelink could make a profit by reining in its expansion but it rightly sees no point in doing that. The product is complete, the market is there and there is plainly no sense in jeopardising the long-term future for the sake of short-term earnings. And if Phonelink doesn't succed someone else will probably pay a good price for it.