The Investment Column: Capital looks to future

CAPITAL RADIO would probably prefer to forget the last two years. Not so very long ago, it was one of the City's favourite media stocks. Then it made an ill-advised move into restaurants, watched helplessly as Virgin Radio was snatched from under its nose by Chris Evans, the maverick DJ, and was told by the Monopolies and Mergers Commission that the deal would probably have been blocked anyway. In just 18 months, Capital's shares lost a third of their value.

So it's no surprise that David Mansfield, Capital's chief executive, was doing his best to draw a veil over the recent past yesterday. Far from being unable to expand in radio - as the MMC report suggested - he reckons there is further headroom for growth, as Capital's two recent acquisitions - alternative London station Xfm and Red Dragon in Cardiff - demonstrate. The company is also lobbying the Government to relax the rules that treat radio advertising as a separate industry. And although Capital is opening up new radio cafes and Havana restaurants, spending on the division is completely ringfenced.

Based on yesterday's figures, this approach looks sensible. Advertising rates rose by 12 per cent in the six months to March, and Capital is confident that radio as a medium will take an ever-larger chunk of the total advertising cake. The result is that revenues grew by 11 per cent to pounds 55.6m while operating profits improved by a tenth to pounds 17.4m.

In the past six months, Capital shares have made up most of the ground they lost in the previous year and a half. They put on 14p to 684p yesterday. On Panmure Gordon's full-year profit forecast of pounds 39m, Capital trades on a forward PE ratio of 19, which is a lot less than competitors like GWR. Given the room for growth in radio - regulators allowing - the shares are a solid hold.