Bass can still hit the high notes

THE INVESTMENT COLUMN

Scottish & Newcastle's proposed takeover of Courage threatens to knock Bass off its perch as Britain's biggest brewer but investors would be wrong to focus too much on that irritation. Beer may well be the core of Bass, but the company has plenty going for it on other fronts to soothe its dented pride.

The number one position in brewing can always be reclaimed, and reasonably swiftly if clearance for S&N's bid opens the way for Bass to buy more leading beer brands or even a regional brewer lock, stock and barrel.

The underlying strength of Bass was evident yesterday in the announcement of an 8.7 per cent increase to pounds 263m in pre-tax profits for the half-year to April. Investors can look forward to an inflation-topping 7.7 per cent rise in the interim dividend to 7.1p.

Operating profits from brewing inched up from pounds 68m to pounds 69m, a good performance in a tough market. The division's share of total operating profits, however, dipped from 24 to 23 per cent as the rest of the business did better.

Bass, like Whitbread, is showing that the pubs market in the UK is becoming a highly specialised retailing area, where the big players, with efficient central managements and economies of scale, have a huge advantage over smaller rivals.

Owned and managed pubs increased turnover in the first half by 3.6 per cent, despite operating 3.6 per cent fewer outlets.

High-margin food turnover grew by 13.3 per cent, and even wet takings, alcoholic and soft drinks, rose 6.6 per cent. The numbers from the leased and tenanted pub estate were nowhere near as good.

Profits from leisure advanced 20 per cent to pounds 42m, largely a result of rehousing bingo clubs from cinemas into purpose built flat-floor venues. Coral Racing, the betting shops side, is holding up despite competition from the National Lottery.

Hotels are at last shaking off the recession, especially in the US. Further increases in occupancy levels enabled room rates to be raised, and hotel profits rose almost 5 per cent to pounds 64m.

Analysts were heartened by the results and upgraded full-year pre-tax projections by 3 to 4 per cent to about pounds 586m.

That gives earnings of 42.4p for a p/e of 14 on the share price of 581p, up 20p yesterday. Good value, backed by a 4.9 per cent yield on forecasts of a 22.7p dividend.

Safe as houses

with Land Secs

With a market capitalisation of pounds 3.1bn, representing more than a fifth of the whole quoted property sector, and with all its pounds 5bn property portfolio located in the UK, Land Securities is really just a proxy for the British direct property market. Conservatively managed, and with a good spread of offices, shops and industrial buildings it cannot be expected to do more than mirror the sector as a whole.

That said, yesterday's full-year figures to March were a fraction better than expected, with profits of pounds 244.7m 3 per cent up on last year. Net assets, the key measure for property companies, were 2.4 per cent higher at 693p, compared with 677p last time and expectations of between 655p and 690p.

Thanks to reasonably comfortable dividend cover, a small fall in earnings per share to 35.2p still allowed the full-year payout to increase by 4 per cent to 25p.

Hardly exciting stuff, but then the market as a whole is in the doldrums - rents are edging up in prime areas (where Land Secs focuses) but with interest rates moving in the wrong direction, capital values are stagnant and likely to remain so.

Working hard just to stand still, the company has recently embarked on a pounds 370m development programme, which is quite the right thing to be doing even though interest charges (which are prudently not capitalised) will eat into already flat profits over the next couple of years.

That means that earnings will continue to tread water and dividends will continue to disappoint relative to the market as a whole.

Given that Land Secs has in effect gone ex-growth for the foreseeable future, the market is likely to focus on the discount of the share price to the company's underlying net worth. Having jumped 21p to 613p after yesterday's figures, the shares now stand at a 15 per cent discount to forecast net assets for the end of this year of 725p.

Despite the fact that rents, earnings and dividends are not growing, that is actually a much smaller discount than the company has experienced over the past 10 or 15 years. In other words, just when the market should be more cautious it is actually less so.

Land Secs is as safe an investment as anyone wanting an exposure to property could expect to find. But with analysts expecting steady growth in earnings from other sectors, it looks overpriced despite a useful prospective dividend yield of 5.3 per cent.

Carlton still has patchy reception

Try as it might, Carlton Communications seems unable to convince the bears that it is doing the right thing. Despite unveiling excellent first-half figures yesterday, the company saw its shares slip 17p to 942p as the market found a clutch of issues to worry about.

The core business looks strong, with operating profits from Carlton and Central Television, its two ITV companies, rising to pounds 60m from pounds 17.4m, boosted by the inclusion of a full six months of income from Central. But Film and Television Services were barely up, affected by the sale earlier this year of a New York operation, and video distribution, a growing part of the business, saw profits drop to pounds 32.9m from pounds 35.5m, the victim of higher costs for video packaging and raw materials.

The company also warned that its Pickwick subsidiary, which makes low- cost videos for the consumer market, was still having problems and was unlikely to recover in the second half.

As well as trading concerns, some analysts are now fretting about what the company might do next, following the Government decision on Tuesday that television companies will now be free, subject to market dominance limits, to buy national newspapers and to invest in cable and satellite services.

The company says it will certainly be looking at acquisitions in related media areas, but stresses that any change to Carlton's basic business would await the outcome of consultations with the Government on proposed reform of cross-media ownership rules.

Despite the niggles, analysts were pleased enough to raise their full- year estimates to pounds 250m, or about 60.5p a share. Estimates for 1996 rise to about pounds 288m, for a p/e of 13.

On that rating, Carlton stands at a discount to the rest of the sector, partly because of its mix of broadcasting, film processing and video distribution.

Longer term, it is not clear how that discount will narrow given concerns about the advertising cycle and the prospects of unspectacular if steady margins in the video distribution business.