Vardy tanks up for further growth

The Investment Column
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The Independent Online
Investors assessing yesterday's pounds 27.3m cash call from Reg Vardy will be hoping the Sunderland-based motor dealer can repeat its performance since the last money-raising exercise in 1991. Over the intervening five years or so, the shares have outperformed the rest of the market by more than 50 per cent. Yesterday's modest 4p fall in the price to 332p suggests the market, at least, believes the group can maintain past performance.

Vardy is offering shareholders one new share at 300p for every five held. The cash will be used initially to reduce debt taken on as a result of last year's expansion programme, which added eight volume car dealerships and three BMW outlets in the South-east through the acquisition of Altwood. Vardy is being forced by the manufacturer's strict limits on ownership of dealers to sell on two of the latter three, in Slough and Maidenhead, to Henlys for around pounds 8m.

But the double cash injection will leave Vardy well placed to pursue its already proven three-pronged strategy of developing a balanced portfolio of volume, specialist and second-hand outlets, while adding a new leg in contract hire aimed at smaller company customers. It is well-timed to coincide with the increasing desire by manufacturers to concentrate sales through fewer, stronger dealership groups, operating across wider territories. Vardy's aim is to grow its 41 outlets to 60 over the next two to three years.

What the group is capable of is demonstrated by last year's figures, which showed pre-tax profits roaring ahead 29 per cent to pounds 14.2m in the 12 months to April.

Despite the inevitable launch and advertising costs of starting up five of last year's new dealerships from scratch, the new operations chipped in pounds 1m to operating profits. Stripping out those and the two BMW outlets being sold, organic growth in the existing businesses pushed operating profits up by a fifth.

This year will be held back by the absence of a large chunk of Altwood, which chipped in profits of pounds 1.3m in the 13 months to April. There will also be dilution from the new shares being issued, which are likely to keep earnings flat.

But Vardy has plenty going for it. Last year's move into second-hand car supermarkets under the MotorZone banner will consolidate the group's leadership of the used car market. Meanwhile, earnings growth from new sales should build steadily.

Finally, and most importantly, the market background remains promising, with new car sales up 5.1 per cent in the first six months of 1995. Profits of pounds 17m would give the shares a prospective multiple of 15. They remain a core holding in the sector.

Belhaven 'ale

and hearty

Long-established beer makers tend to command a fair degree of affection, so it is perhaps hardly surprising that shares in Belhaven Brewery have been priced at the top end of expectations. The shares in Scotland's largest and oldest independent brewer (established 1719) have been priced at 180p, valuing the company at pounds 36.3m. The broker Charterhouse Tilney claims demand for the placing has been strong from institutions. But as with so many flotations, smaller investors will not be able to buy shares until they start trading on 12 July.The float will raise pounds 21m net of expenses, of which pounds 10m will be used to redeem preference shares and pounds 11m to cut debts.

Belhaven's strength is its strong brand of ales, including Belhaven Best, which have helped a relatively small company grab an estimated 5 per cent of the Scottish ale market. As well as its cask-conditioned ales, Belhaven is also targeting the keg beer market and seeking to grow its range of bottled beers, such as St Andrew's Ale.

It intends to grow the estate from 67 managed and tenanted pubs. Some of the outlets have been converted to Scottish themes, including the more traditional St Andrew Taverns and the Droothy Neebors boozers aimed at the younger market (the name means Thirsty Neighbours).

The current management team has also had time to get to grips with a business which once had four chairmen in a single year. This was during a period when it was part of Control Securities, the vehicle of Ugandan businessman Nasmu Virani.

The company's main difficulty is that it is operating in a highly competitive market dominated locally by Scottish & Newcastle, Britain's biggest brewer. However, Belhaven has signed a new agreement with Bass lasting until 2001 under which it can distribute Tennents lager, the best-selling brand in Scotland.

Last year the company made operating profits of pounds 4.2m on sales of pounds 29.6m. With historic earnings per share of 13.1p before exceptional items the shares will trade on a historic rating of 14. A discount to the sector, but not to be chased given its relative lack of exposure to the currently popular themed pub sector.

Pulp disaster for Inveresk

Inveresk, the Scottish speciality papermaker, is typical of the new issues class of '93. Launched on the high tide of investor interest in stock-market flotations, a placing and intermediaries offer at 150p was more than six times oversubscribed and the shares quickly raced to a handsome premium.

Inveresk's fall from grace began a year ago, when soaring wood-pulp prices were blamed for a drop in profits. Yesterday it was what Inveresk called "the extremely rapid collapse" of those same wood-pulp prices that lay behind an interim pre-tax loss of pounds 2.78m.

The shares closed down 3p at a new low of 119p on the news.

The reason Inveresk was clobbered so hard when pulp prices went up and down is an ill-timed acquisition, its first since becoming a public company. When it paid pounds 33m for Alloa-based Weir last November it had to use up 16-weeks' supply of pulp bought at the top of the market. It is normal practice in the paper industry to buy four weeks ahead.

Disaster struck when pulp prices collapsed by over 50 per cent in the first quarter. Inveresk was left with 60 per cent of its first-half sales of pounds 73.9m containing high-cost pulp. Worse, falling paper prices exacerbated the drop in sales volumes, which fell 14 per cent compared with the previous six months.

A maintained 1.93p interim dividend suggests Inveresk thinks the worst may be over, now that demand is increasing and pulp prices have stabilised. UBS expects full-year profits to fall from pounds 8.3m to pounds 2.5m before an exceptional pounds 1.4m charge linked to restructuring at Weir. That puts the shares on a chunky forward ratio of 33-times forecast earnings.

Perhaps Inveresk was unlucky to be so exposed to what it calls "the unprecedented speed of these changes". But in suffering more than most, Inveresk has lost its reputation as a defensive paper stock and the downward re-rating may have further to go. Avoid for now.