Vaux looks for sweeter dreams

investment column

Vaux is nearing the time when the snooze side of its business - hotels and nursing homes - will make more money than the booze - inns, brewing and wholesaling. Most of the change in the trading mix can be attributed to industrial blight over the past decade in Vaux's north-eastern heartland, exaggerated by changing social habits, and demographics.

The result of all this in the six months to 18 March was a decline in the share of total trading profits from beer and pubs from 57.7 to 53.6 per cent, and an increase from Swallow hotels and nursing homes from 42.3 to a shade over 46 per cent.

Collectively, the four businesses produced a 13 per cent increase in taxable profits to £11.7m, a solid performance given that there were £500,000 of reorganisation costs and £222,000 of property losses. The interim dividend rises 3 per cent to 3.45p.

This picture of trading is something that investors will have to become accustomed to. Vaux is unable to extract the best from its pubs because, quite simply, the bulk of the estate is tenanted and therefore misses the benefits that centralised management brings.

Profits from its 140 managed houses rose 11 per cent to £2.7m, driven mainly by food sales, which climbed 30 per cent. In contrast, beer sales fell 4.4 per cent across the 800-plus tenanted houses, of which fewer than half offer a decent menu.

That brewing and wholesale profits, which includes tenancies, increased at all, by a marginal 1.5 per cent to £8.77m, owes more to productivity gains and contracts with big brand owners, like Labatt's and Whitbread, than to trading improvements.

Sweeter dreams, though, can be had in the snooze business, particularly in hotels where economic recovery is stimulating more conferences and increasing demand for overnight stops by corporate clients. Occupancy levels at Swallow hotels rose from 58.3 to 62.9 per cent, and are still shy of their all-time high in 1989 of 68 per cent. Hotel profits climbed 29.1 per cent to £7.6m, and there is ample scope for more growth.

St Andrews Homes' profits improved a marginal 1.2 per cent to £2.17m, although the result was pegged by the company's policy of taking start- up costs at new sites on the chin.

Group profits this year should hit £32m, up from £29.3m. A rising tax charge, however, will erode much of that gain and earnings per share will rise only from 16.5p to 17.5p. The shares, down 1p to 236p yesterday, are fair value given the support from a chunky 5.4 per cent gross yield if the dividend total, as expected, rises from 9.85p to 10.2p.

Outlook is still bright at BP

Since Bob Horton's departure from BP in 1992 the transformation of the oil company has been remarkable and, despite the 150 per cent rise in the share price, possibly still not fully appreciated by the stock market.

When David Simon took over as chief executive the company was outspending its cash flow, working on over-optimistic expectations for the oil price and over-distributing its profits to shareholders. Drastic action was needed and demanding targets were put in place for the following four years.

First-quarter results yesterday confirmed that BP is firmly on track to meet projected full-year profits of £2bn by 1996. Mr Simon is rightly pleased to be handing over to his former exploration chief, John Browne, on a high note.

Most factors seem to be moving in the right direction finally. The oil price at over $18 a barrel is almost $3 higher than a year ago, with the full impact still to show through to profits. The cost base has been slashed and, thanks to technological improvements and better focus of resources, productivity is much improved.

Admittedly, not all is rosy, with the benefits of a range of activities underscored by a disastrous refining and marketing performance. Margins down 30 per cent reflected excess industry capacity and an unusually mild winter.

BP's problem in refining is exacerbated by its bias towards the mature markets of Europe and the US, where analysts remain gloomy about the prospects for margins, with supply likely to continue to outstrip growth in demand.

The fall in profits from refining took the shine off an excellent result from chemicals, where higher demand from recovering Europe and lower costs resulted in a much better return on sales, albeit still 25 per cent below the peak in 1989, and at last a decent return on capital employed.

Looking ahead, the outlook remains bright. Earnings per share are forecast to continue growing at a rate of about 13 per cent a year for the next five years and the dividend should grow faster than the market average to reach pre-cut levels by 1998.

Despite the rise in the shares - they have outperformed the rest of the market by 56 per cent over the past three years - they still stand on a prospective p/e of only 11 to the end of next year. Good value.

A hard struggle for Sidlaw

It is now clear that Sidlaw badly mistimed the £79m acquisition of Courtaulds' flexible packaging business nearly two years ago. At a stroke, that deal transformed the Scottish mini-conglomerate into one of Europe's top five packaging groups.

But things quickly started to go wrong and the group has been squeezed between rising raw materials prices - up as much as 80 per cent - and ferocious competition from deeper-pocketed Continental rivals. Yesterday, Sidlaw confirmed its worst predictions at the time of last January's profit warning, unveiling a dip into losses of £1.16m for the six months to March, after profits of £6.85m last time. The figures were hit by a £5.24m loss on the disposal of the old jute business. The margin squeeze probably sliced off a further £3.5m.

Digby Morrow, chief executive, believes the worst cost pressure is over, but warns there is little sign of let-up in the level of competition. That is likely to spell more misery for investors already sitting on substantial losses after backing two rights issues - at 275p and 180p - in the past two years. Yesterday, the shares slumped another 14p to 145p.

The interim dividend is being pegged at 4.5p. Sidlaw is pinning its hopes on delivering price and quality in pressing on with an expansion programme that will add 20 per cent to capacity by this autumn, despite clear signs of oversupply in the industry. Mr Morrow will be under extreme pressure to perform, but the shares look unattractive, even on a forward multiple of 13, based on Credit Lyonnais Laing's prediction that profits will now be £9.5m this year.