Menzies loses out in paper chase

THE INVESTMENT COLUMN

The slump in half-time profits at John Menzies from pounds 7.3m to pounds 3.8m looked rather worse than it actually is, given the heavy second-half bias of the company's retailing operations. Even so, with little prospect of clawing back any of the damage in the second half, according to the company, analysts' forecasts of up to pounds 45m pre-tax profits look like being pounds 10m too optmistic.

It was no surprise in those circumstances to see the shares slip 29p, or 5 per cent, to 589p, bang in the middle of the becalmed trading range of the past couple of years. Investing in the retail sector has been a volatile game so far this year, with as many companies issuing profits warnings as boasting of buoyant Christmas trading.

The damage was, predictably, in the newspaper wholesaling arm, where the business is being squeezed from both ends by cash-strapped publishers and supermarket chains hungry for market share. Ranald Noel-Paton, managing director, reckons much of the pounds 4m hit in the first six months was a one- off, but it is hard to see that market improving in the near future, any more than it did for NFC and others, once the big retail chains wised up to the fat margins enjoyed by those distribution specialists, and put the squeeze on.

The pace of Menzies' diversification into other distribution markets, such as CD-Roms, computer games and office supplies, suggests the company itself has little faith in the business that currently supplies maybe three-quarters of its distribution division's turnover. Profits slid from pounds 13.6m to pounds 10.8m.

The problems afflicting wholesaling would matter less if the other side of the business, the John Menzies and Early Learning Centre retail operations, were not mature and highly competitive.

In the first half they accumulated a combined loss of pounds 5.6m, slightly better than last year's pounds 5.8m deficit but still putting a great burden on the important Christmas trading period to rescue group profits for the year to April. In fact trading over the festive period was disappointing. The Early Learning Centre, especially, saw trading deteriorate throughout 1995.

Menzies has produced an impressive run of earnings and dividend growth over the past five years. Unwilling to surrender this record, it increased the half-year payout by 4.4 per cent to 4.8p. Even at that level, where it provides shareholders with a paltry 3 per cent yield, it was badly uncovered by earnings per share of 3p , down from 7.6p.

On the basis of the company's full-year profits hint, say pounds 34.5m, the shares stand on a prospective price/ earnings ratio of 15. Given the uncertainty, that is asking too much.

Superheroes lift Bluebird Toys

Shares in Bluebird Toys have eased a bit since October, when the announcement of a marketing link-up with Disney sent them soaring to a high of 375p. Selling by founder and chairman Torquil Norman and the charitable trust he established has not helped, but nothing sinister should be read into these moves. Mr Norman, who is 63, has long intimated his intention to step aside to spend more time on charitable causes and last month he confirmed he would retire in May.

More important was yesterday's three-way licensing agreement between Bluebird and three big US entertainment and toy groups, Time Warner, Hasbro and Marvel, for Batman and Spiderman. Bluebird is acquiring the Batman rights from DC Comics, part of Time Warner, and Spiderman from Toy Biz, an offshoot of Marvel. The deal confirms Bluebird's status as a serious player in the toy industry and yesterday's 18p rise to 338p looks fully justified.

Like the Disney tie-up, the new rights give Bluebird access to two extremely well-known "brand" names, which have proved their enduring value. Bluebird will design and manufacture the miniature playsets derived from Batman and Spiderman, which will be similar to its successful Polly Pocket and Mighty Max ranges, and will handle distribution in the UK and Ireland.

But equally important is that, having joined with US toy giant Mattel for the Disney deal, it has now cemented a link with the US distributor Hasbro. The latter will distribute the Batman range outside Britain and Ireland and Spiderman products in all countries outside the home markets, except the US, Canada, China, Japan and Mexico.

Batman figures should be available in the first quarter and Superman probably in the third, the company says. No figures are being released, but analysts believe it could add pounds 6m to revenues this year and pounds 8m next.

The demise of Mighty Max means profits probably slipped to pounds 18m last year, but could recover to top pounds 23m this year, putting the shares on a forward multiple of 11. Still good value, with Hasbro sitting on a 6 per cent stake.

A nice dram

for Highland

Highland Distilleries seems to have done itself, and perhaps its partner Remy Cointreau, a good turn by buying Remy's 26 per cent stake in Macallan Glenlivet. The deal includes shares that Highland originally gave to Remy in 1990 as part of a complex cross-shareholding and shared- marketing arrangement in the markets around the world where the vast bulk of Scotch whisky is sold.

Remy gets pounds 46.6 m in cash to help in its debt-reduction programme. It will continue to distribute Macallan in several overseas markets, notably the US. Remy's own 9.4 per cent stake in Highland has also appreciated steadily.

But Highland has certainly had the better of the deal. Highland gave Remy a 12.7 per cent stake in October 1990 when they were worth around 250p a share. It now doubles its original stake at 152.5p each, a deep discount to last Friday's market price of 178p, and its own stake in Remy is in the form of convertible bonds yielding 6 per cent.

Highland took over the distribution of the Macallan in the UK in 1994, and now has an increased incentive to promote it further. Highland's best- known blended whisky, the Famous Grouse, and the Macallan malt complement each other in the UK. Sales of Macallan are growing, with the help of a clever marketing campaign. But Macallan is not exactly a cash machine. Even at last night's price of 160p the shares yield barely 1 per cent and sell on 35 times annual earnings. Turnover and profits have fluctuated in a narrow range in recent years.

A Highland bid for full control cannot be ruled out, of course. But the directors still hold up to 27 per cent of the shares, and Suntory, the Japanese drinks giant, speaks for a further 26 per cent, so a knock-out bid could prove very expensive. That said, Highland has combined a share structure which protects it from hostile outside bids with a policy of expansion and diversification which has substantially raised its profits and market share in the past decade. At 14 times earnings the shares are well worth holding.