St Ives looks impressive in print

The Investment Column

Quality was again the dominant theme in another year of record annual figures from St Ives, the printing group. Just weeks after rival Watmoughs saw its shares dive 10 per cent on news of lower profits and a warning of over-capacity in the industry, St Ives has been able to report a healthy 19 per cent rise in pre-tax profits to pounds 42.2m for the year to August.

The figures were all the more impressive given the continuing problems the group is having with new presses at its Caerphilly works and the pause in the magazines market caused by volatile paper prices. Poor reliability and low productivity have dogged the Heidelberg Harris machines at Caerphilly for the past year or so, at a cost to the group of up to pounds 1m, according to one analyst's guesstimate.

Meanwhile, profits in UK magazines, where St Ives is a leading player, suffered as a result of last autumn's sharp rise in paper prices. Although the group bears no direct risk from the increase in costs, its customers do and the higher prices prompted them to cut back pagination and delay the launch of some new titles.

But the outlook is now looking up on both fronts and elsewhere St Ives is firing on all cylinders. Book printing continues its solid growth, despite the collapse of the net book agreement. The multi-media business printing inserts for CD-Roms and compact discs continues to grow at double- digit rates, while "overnight" printing of takeover and other financial documents rode high on another bumper year for City bids and deals.

But the real growth for St Ives, facing a mature and oversupplied UK market for its traditional services, lies in direct response promotional printing and overseas. Growth in the UK market for direct mail at up to 9 per cent is several times that of St Ives' bread and butter business and it is continuing to win custom ranging from the Inland Revenue to Bupa.

This market has also been the focus for the group's recent acquisitions, with Johler Druck in Germany chipping in pounds 2.7m for 11 months and the recent pounds 22.6m purchase of Perlmuter of Ohio due to contribute this year. Expenditure is likely to wipe out the group's cash pile by next August, but the group could still spend pounds 40m and leave gearing at a comfortable 30 per cent or so.

Certainly the group may struggle to maintain recent rates of growth in the core business this year. Even so, the rise in high street sales means the general environment for St Ives's products is improving, particularly magazines, and it should be helped by the recent decision by a major player to cut capacity. Henderson Crosthwaite expects profits to hit pounds 47m, putting the shares on a forward p/e of 15. Fair value for such a conservatively managed group.

Mature markets slow down Lucas

Lucas Industries' last set of results as a separate company helped demonstrate why it will have to reach top gear quickly to meet investor expectations in its new merged incarnation as LucasVarity. Its main automotive and aerospace markets are mature, which means that sales growth is never likely to be spectacular. This is a problem for a business with classically high operational gearing.

Stripping out the contribution from Lake Center Industries, underlying sales in the automotive sector, the source of 80 per cent of the group's pounds 3bn turnover last year, grew by just 5 per cent. Aerospace turnover grew by a healthier 8 per cent, helped by booming sales of the Rolls Trent 800 engine and the Airbus A319, both of which feature Lucas control systems. But the doubling in operating profits to pounds 47m flattered to deceive, being a product largely of the restructuring provisions used to cover losses in the Geared Systems division.

The merger with Varity of the US will provide an immediate 20 per cent boost to earnings, as result of cost savings and tax benefits - Lucas alone has some pounds 160m of accumulated tax losses and unutilised ACT. But investors are justified in wondering where the growth will come from after that, even with the aggressive figure of Victor Rice at the wheel. LucasVarity lacks clear market dominance in any area.

Meanwhile, the restructuring to be unveiled in the next six weeks will be comparatively modest, involving the disposal or closure of businesses accounting for pounds 200m of sales at best.

LucasVarity says that future earnings enhancement will lie in selling more sophisticated products with increased value-added content such as the new electronic brake actuation and power steering systems it is developing. But initially these will be small beer and, in any case, both are products Lucas was developing long before Varity emerged on the scene.

The other growth area - developing countries such as India, Korea and China - will take time to bear fruit.

With a prospective p/e of 16 times for 1997, based on profits of pounds 325m, falling to 13 in 1998, the shares might not look expensive but there are better bets elsewhere in the sector.

United showing plenty of flair

Manchester United's performance on the stock market has all the flair of a Ryan Giggs shimmy. With television money pouring into the sport and football clubs becoming increasingly savvy about exploiting merchandising and other commercial opportunities, it is small wonder that United's shares have proved so strong. They have now risen almost six-fold since the company was floated in 1991 and edged 2p higher to 453.5p yesterday.

Yesterday's results for the year to July showed that the Old Trafford money making machine is still going strong, though last year's record off the pitch was not the club's best. Profits before transfer fees were flat at pounds 16.7m - including signing fees they fell from pounds 20m to pounds 15m. The main reasons were the rebuilding of part of the Old Trafford stadium, which reduced spectator capacity, the absence of income from the European Champions League and the replacement of video and publishing sales with a royalty income. On the plus side there was a boost from the Euro 96 games staged at the ground.

This year the sales line should improve dramatically. The new stand is completed and the 55,000 capacity stadium is selling out regularly. United is in the Champions league this season, which should be worth at least pounds 5m.

But with gate receipts now accounting for just 35 per cent of sales, it is television money that is increasingly important. The Premiership's lucrative new contract with BSkyB starts next season. There is also the possibility of a pay-per-view deal and cable television programming. Chief executive Martin Edwards warned that capital expenditure costs would remain significant.

Wise Speke is forecasting pre-transfer profits of pounds 23m this year. After such a strong run there is an argument for taking some profits but the possibility of more television deals makes the shares well worth holding.