Thorn prepares for a tough year; THE INVESTMENT COLUMN

Thorn's promise to return pounds 87m of excess cash to shareholders is small comfort for battered investors who have seen shares in the rentals group more than halve from their 408p level since splitting from EMI last August.

On the plus side, the handout is an obvious way to ensure that a long- term decline in profit doesn't feed through to earnings by reducing the number of shares in issue. Thorn estimates the handout will enhance earnings per share on a pro forma basis by 12 per cent over a 12-month period. Accordingly, City estimates of earnings per share for next year are in the region of 22.6p, and 23p in 1999.

Although Thorn's share price improved 12p to 162p yesterday morning, by the end of the day it had fallen back to 156.5p, reflecting market concerns that, despite the sweetener for shareholders, the company has been slow to safeguard its future.

Thorn's chairman admits the cash bonanza can't disguise a tough year ahead. Profits before tax for the year to the end of March were flat at pounds 171m, hindered by falling sales in the United States and poor results from the UK's Radio Rentals division. Thorn is now grappling with these problems, albeit belatedly, by focusing its attentions on key brands such as Radio Rentals and Crazy George's, a cut-price rental outfit, and thinking again about marginal businesses in continental Europe.

The closure of 90 smaller, under-performing branches of Radio Rentals was announced earlier this year and Thorn is keeping check on its store portfolio. Meanwhile, the group hopes to open up to 25 more Crazy George's stores in the UK in the next year. Further afield, Thorn is tidying up loose ends and has received approaches for its Danish retail business, Fona.

A further thorn in the company's side is litigation in the US, where several US states are claiming customers have been charged inflated interest rates as part of Thorn's rental agreements. The group has been forced to make a pounds 17.1m provision against possible damages relating to a case in Minnesota.

Many in the City say these valiant efforts at reform are too little too late and there is a shortage of firm evidence to suggest that rolling out the Crazy George's brand is a good idea. City forecasts for pre-tax profits are around pounds 135m, with a further drop to pounds 130m expected in 1998/99. Thorn's appeal for mainstream investors is, at the moment, limited.

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