View from City Road: Asda way to make money

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The Independent Online
ARCHIE NORMAN, chief executive of Asda, made a cool pounds 210,000 between breakfast and teatime yesterday. This is the extra profit on the 4.4 million options he was given at 38.5p in December 1991, now worth pounds 1.3m, when he left the safety of Kingfisher to join the the ailing supermarket chain. And some said he was mad to take the job.

A 4.75p rise in the Asda share price to 67.75p in the wake of a pounds 347m rights issue, the second in 16 months, shows how much the City appreciates a genuine recovery story and talk of accelerated growth. Mr Norman also deserves credit for jumping to the head of what may be a long queue of companies seeking to raise equity before the gilt flood.

There were plenty of cheerful new numbers yesterday. Christmas trading beat industry averages and 2 per cent sales growth so far this year implies rises, however minuscule, in volume while others have fallen.

A forecast of a 50 per cent rise in pre-tax profits to at least pounds 130m in the year to May, excluding rights issue effects, was right at the top end of expectations. And a dividend forecast of 1.6p, which implies a yield of 4 per cent on the new shares, provides a platform for what should be a renewed progressive payout policy. Gearing, nearly 100 per cent in 1991, is down to a pro forma 7 per cent and the ill-fated pounds 700m purchase of 60 Gateway stores in 1989 has now been funded by equity, as it should have been in the first place.

But mildly to outperform the supermarket majors from a position as dire as Asda's is not difficult. A pay freeze coupled with a one-off management clearout that has lifted productivity by 10 per cent is, with greater fresh food sales, more than offsetting any erosion of gross margins from more competitive pricing.

You cannot do this year-in, year-out. Which is why the rights money is needed to resume Asda's growth from mid-decade. But on Nomura's forecast of at least pounds 185m pre-tax in 1993/4 and a 25 per cent dividend rise to 2p, a prospective yield of 4 per cent is a comforting premium to the sector.