Woolwich figures fail to impress

The Investment Column

Woolwich, the former building society, passed the first test of a newly floated public company by beating its first profit forecasts by pounds 5m yesterday. It declared a headline profit of pounds 215m in the six months to the end of June, an increase of 13 per cent on the same stage last year. But once the costs of converting from building society to bank are deducted, the published profit before tax shrinks to pounds 188m and the improvement to just 2.5 per cent.

The uptick was almost entirely due to a reduction in the level of bad debts and a more modest drop in operating expenses, down from pounds 178.8m to pounds 173m. Operating expenses as a percentage of income fell from 46 per cent to 43.8 per cent.

The top line hardly presented an inspiring picture of growth. Operating income was only 2 per cent higher at pounds 395m, while interest income was actually down a touch at pounds 302m, even if fees and commissions rose a more healthy 9 per cent to pounds 93.2m.

At a time when the property market has been improving, especially in Woolwich's core areas in and around London, it was hardly impressive that gross lending fell by a sixth to pounds 1.7bn.

Indeed, the company's share of the market in new mortgages plunged from the admittedly exceptional level of almost 10 per cent a year ago to just 4.6 per cent in the first half of this year, as the new bank cut back on its more generous discount and fixed-rate offers.

The savings side reflected the bank's need to control the outflow of savings from accounts of customers who had been effectively locked into Woolwich for the past 18 months, while they waited for their windfall shares, and were now once again free to move.

In fact the outflow had been much less than expected, group finance director Robert Jeens said yesterday. But the customer interest margin, the difference between the average lending rate and the average rate paid on deposits, has narrowed from 2.3 per cent to 2.1 per cent.

Fee income and commission still accounts for less than a quarter of operating income. Fees from insurance contributed pounds 30m, unit trust management made pounds 25m and lending fees pounds 15m, but income from the estate agency chain fell slightly to pounds 23m and the chain only just about broke even.

The City, meanwhile, thinks the shares are overvalued by 30p to 40p. Jeremy Batstone at NatWest Stockbrokers is forecasting a headline profit of pounds 395m for the full year, with more to come in 1998.

After rising 5p to 297p yesterday, the shares are on a forward rating of 18, above Lloyds TSB and comfortably ahead of Abbey National, an earlier building society conversion with a much longer track record on the market.

At this price, the shares are assuming either a bid is on its way or a bumper special dividend next year.

Those with less faith will seek better fundamental value elsewhere in the sector.

Currency worries overrated at GKN

CK Chow, who joined GKN last summer, is gradually accelerating the pace since he took on the chief executive's role from the group's long-time head, Sir David Lees. Dismissing the prospect of a more fundamental review of the company yesterday, Mr Chow painted a more subtle expansionist strategy. "It would be foolish to do an operation on a healthy patient," he said, adding that the change in emphasis was "very subtle", to make the company more entrepreneurial.

Yesterday's jump in GKN's share price, which ended 70p higher at pounds 11.56, reflected satisfaction with the Chow regime, but was also a response to much better-than-expected first-half results. Pre-tax profits rose by 12 per cent to pounds 203m, after taking into account the pounds 18m cost of the over-valued pound. GKN said sterling's impact was largely confined to translation, rather than real trading, because most businesses around the world supplied mainly for local markets. Excluding currency, profits were up 25 per cent.

This bottom line growth has helped GKN build a substantial cash pile, which stands at pounds 247m even after May's pounds 350m deal to buy Sinter, a US powder metals business. Mr Chow is not going to move too quickly to spend surplus cash, pledging instead to step up organic growth in the car components, pallet hire and Westland helicopter businesses. He ruled out a takeover bid for Vickers, pointing instead to possible joint ventures in their armoured vehicle divisions.

And the core businesses themselves look in good shape. Car components' profits were up 23 per cent. Chep, the pallet hire operation, was 31 per cent ahead, after adjusting for adverse currency movements and, significantly, Westland's order book is growing well, with recent orders from Italy and Asia.

The one cloud on the horizon remains GKN's US court case, where it could face pounds 240m in damages over claims by discount exhaust franchise operators. But provisions of pounds 270m have been established and the appeal process is likely to continue for at least 18 months.

Full-year profits of pounds 407m would put the shares on a forward p/e of 15, some 5 per cent below the sector average. Sterling worries are restraining the rating, but the fears look overdone, making the shares reasonable value.

CSC cashes in on

double whammy

Capital Shopping Centres captures in one company two of the big growth themes of 1997, property and retailing. And CSC controls many of the UK's prime retailing assets. Its eight English shopping centres, which include the huge Lakeside Centre in Essex and the MetroCentre at Gateshead, are still proving a bigger magnet for consumers than more traditional shopping areas.

So on top of the 8 per cent surge in non-food retail spending seen nationally in the first half of this year, CSC's tenants have been gaining market share.

The company benefits directly from this double whammy by taking a turnover- related levy from the occupiers of its space. In the half-year to June, that helped rental income to rise 10 per cent to pounds 62.7m and pre-tax profits increase 31 per cent to pounds 36.3m.

CSC has taken the unusual step of institutionalising a full revaluation at the half-year stage, throwing up a revaluation surplus of pounds 135m over the six months.

When account is taken of retained profits, this translates into a fully diluted net asset value per share up 10 per cent to 346p over the year- end figure. That was well ahead of market expectations yesterday, pushing the shares up 5p to 401.5p and year-end forecasts to around 375p.

Even though the CSC portfolio has appreciated by 27 per cent in 18 months, there should be more to go for. Prime rents at Thurrock have risen by a third since the start of 1996 and should soon go to pounds 300 a square foot, while yields, used as the basis for valuing the properties, could be ready to break below 6 per cent, down a full point on early 1996.

Geared into the retailing boom, CSC will suffer if retailing goes into reverse, but interest rates have yet to bite. Equally, while Bluewater, the Kent shopping centre due to open in 1999, will be a potent rival to Lakeside, there should be room in the giant London catchment area for them both.

At a 7 per cent premium to forecast net assets, the shares remain a firm hold.