View from City Road: Strange tactics at Hillsdown

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AFTER Sir Harry Solomon, the deluge. Blood flowed all over Hillsdown Holdings' 1992 results yesterday. Turnover fell, taxable profits slumped to pounds 154m from pounds 186m, the tax charge rose and pounds 160m of cash cascaded out of the business.

That was just the start. A mammoth pounds 92m extraordinary charge loomed below the line - no polite bows towards FRS3 here - and included provisions of pounds 56m against losses on the disposal of businesses from which Hillsdown is withdrawing.

Away from the public gaze, Hillsdown notes that FRS3 profits fell from pounds 149.6m to just pounds 94.5m. But, whichever way you add it up, a maintained dividend of 8.8p has been paid entirely out of reserves, leaving a pounds 60m hole in shareholders' funds.

Perhaps you cannot blame Hillsdown for using extraordinaries while it still can, but it takes gall to use the device in the way it has. The soon-to-be compulsory FRS3 accounting standard will more or less define away such practices.

The stock market may remember Hillsdown's extraordinary tactics when looking back at 1992 earnings, stated as 13.6p but in reality nearer nothing at all. However, as the share price reaction - unchanged at 163p - shows, the market has already discounted the Hillsdown nightmare.

The hope is that the company, an archetypal 1980s acquisition-led growth stock, can adapt and flourish organically. It is easier to believe in Hillsdown now that the experienced hand of the ex-Defence Secretary, Sir John Nott, is on the tiller, having replaced the founder chairman and chief executive, Sir Harry Solomon.

The refreshed management team seems to be making a good fist of refocusing Hillsdown. And, while the company is not out of trouble, it is at least possible to envisage Hillsdown with a convincing future.

To presume there will be no more one- off horrors at Hillsdown requires a degree of faith. But if the company manages to repeat the 1992 operating performance this year, and is able to avoid any more nasties, the shares have some attractions.

Profit before tax could move ahead to pounds 175m, with earnings per share of about 13.5p. On those figures the shares, up 3p to 166p, are trading at a prospective multiple of 12 times, and with another 8.8p payout this year the shares are supported by a gross dividend yield of 7 per cent.

It looks to be a buying opportunity for recovery funds, but Hillsdown is no place for widows or orphans.

(Photograph omitted)