Vaux needs to tap pub profits

The Investment Column

Presenting its half-year results the day after Whitbread, Vaux must expect comparisons to be made, however invidious. Both companies realised they needed to diversify away from brewing to escape the long- term decline of that business and both have done so, but with differing amounts of success.

Vaux's half-year figures yesterday, showing a 14 per cent increase in pre-tax profits to pounds 13.3m, confirmed the problems the Sunderland-based company continues to face in generating a decent return from its tenanted pubs. Falling profits from its 771 leased sites, together with another disappointing performance from nursing homes, succeeded in disguising another strong half from the Swallow Hotels and managed pubs.

Vaux picked up the majority of its community watering holes in the wake of the beer orders which forced the brewing giants to get rid of a large slice of their estates. Not surprisingly, however, the giants put their least attractive sites on the market and Vaux has been saddled with more than its fair share of old-fashioned, dingy boozers.

Unpalatable as it may be to anyone who still thinks a pub is a quiet place to enjoy a drink away from the bustle of family life, companies like Whitbread are leading the way towards female-friendly, food-oriented outlets that leave much of the Vaux estate looking drab and dated.

The City may well have gone overboard recently in its love affair with this sort of managed inn, ignoring the high return on capital available from old-style tenancies, but as profits continue to dwindle its scepticism is understandable. Weekly profit per pub is going nowhere and it is going to be anuphill struggle to tart up those pubs in the portfolio where poor location precludes any meaningful improvement.

The time left to perform that transformation is running out, with the hotel market, which now provides getting on for half group profits, fast approaching a peak. Rising occupancy levels and higher room rates are tiding the company over but the time will come when it is the turn of booze rather than snooze to carry the banner.

Vaux's shares have performed well over the past few years, for two reasons. The dividend has been maintained at a high level, despite thin earnings cover, which has given the stock income attractions. The company has also been in and out of the takeover frame, with the likes of Bass thought to be interested in Vaux's strong regional position in the North-east and its useful hotel portfolio.

With no blocking family shareholding, takeover froth is likely to continue, which removes much of the risk in the shares. On a prospective p/e of 17 falling to 16, however, they would appear to have little upside. Fairly priced.

A high price for FirstBus to pay

It is typical of FirstBus, Britain's second biggest bus operator, that no sooner is the ink dry on one deal than another one comes along hard on its heels.

Such is the pace of consolidation in Britain's bus industry that FirstBus - itself formed last year from a merger of Bristol-based Badgerline and Aberdeen's GRT - yesterday agreed to fork out up to pounds 110m for Strathclyde Buses only three days after the Glasgow bus company's accounts for the year to March had been audited.

By any reckoning FirstBus has paid way over the odds. In March, FirstBus bought Greater Manchester Buses North for pounds 47m - or about three-quarters of sales. Just two months later, it is paying twice as much - 1.5 times 1995 turnover - for Strathclyde.

Shareholders are also being asked to subscribe to a two-for-seven rights issue at 140p, raising pounds 90m, to fund the deal.

The biggest winners are undoubtedly the 2,000-plus Strathclyde employee shareholders who stumped up pounds 300 for shares three years ago and are now getting pounds 35,100 back. Rival bus operator Stagecoach has not done badly, either. Its 20 per cent stake in Strathclyde, for which it paid pounds 8.9m 16 months ago, was sold yesterday for pounds 23.9m.

Stagecoach chairman Brian Souter, who is standing down from the Strathclyde board, indicated FirstBus has paid top dollar for its latest acquisition. Stagecoach had pre-emption rights on any bid, but as Mr Souter put it yesterday: "There was a price at which we were a buyer and a price at which we were a seller. We are delighted with our return."

Even FirstBus admits it paid up to pounds 60m more for Strathclyde than the local press had been speculating.

The consolation for shareholders is that FirstBus gets a company with a dominant position in an attractive bus market covering 1.7 million people. And judging by the way the Manchester bus acquisition is already exceeding expectations, there is no reason to doubt that the Strathclyde deal will enhance earnings in its first year.

The concern is that FirstBus has simply paid too much for what is probably the last urban franchise of its kind. For that reason alone, ignore the rights.

Capital hits gold as radio booms

It is a good time to be in commercial radio, as Capital's stellar interim results attest. Still the fastest growing medium in the country - albeit from a small base compared with the giant TV and print businesses - radio is red hot. Capital has taken particular advantage, thanks to its London franchises, both AM and FM. What other business could generate pre-tax interim profits of pounds 15.6m on sales of just pounds 38.1m?

There is probably more growth to come. After much lobbying, Capital and other big radio groups have convinced the Government to relax the FM licence limit, which has up until now constrained the likes of Capital. When the Broadcasting Bill is passed, probably by this summer, Capital will be free to bid for the recently advertised new FM licence in London. It will no doubt propose shifting its AM Gold format to the much better quality FM frequency, with positive implications for future profit growth.

Capital's management cannot afford to be complacent, however. The company is sitting on a cash pile, which could attract predators. Moreover, there is no guarantee that it will win its London licence, given the likely competition. Quite rightly, the company has been looking elsewhere for growth. It is one of the applicants for the Yorkshire regional licence, and is on the verge of announcing a joint venture in India, as the first step in a stated policy to expand overseas.

More controversially, it is opening a themed restaurant at its new headquarters in central London. The move will cost a robust pounds 8m.

On fundamentals alone, Capital looks dear at 23 times earnings (assuming full-year earnings of 28p and a share price of 673p). But the prospect of a bid for the group, possibly from one of the big newspaper publishing groups, and its impeccable performance in recent years, will continue to underpin the stock.