The Investment Column: NFC on a slow road to recovery

NFC, the old National Freight Corporation, is taking a while to respond to the treatment being meted out by new management. Gerry Murphy, the chief executive brought in by chairman Sir Christopher Bland, has been wrestling for the past two years with what is probably the world's largest and most restructured transport and removals group.

But the shares, up 0.5p at 128.5p, have stubbornly refused to respond, underperforming the rest of the market by 58 per cent since the beginning of 1994. Yesterday's new round of exceptional charges and continuing losses in Europe must count as a further disappointment on the long road to recovery.

The "clean" pre-tax profits of pounds 50.1m for the six months to March, representing a 13 per cent rise on the restated figure for the comparable period, were respectable enough. But, despite Sir Christopher's confident assertion that the group is now out of the woods, it is clear there is still plenty of work to be done.

Yet another reorganisation programme, accounting for a pounds 49m charge in these figures, will see some 60 properties go in the UK, a management shake-up in Europe and the loss of some 500 to 600 jobs overall. The pounds 39m cash cost of the plan is expected to be recouped from savings in the first two full years.

But there must remain doubts that the Augean stables have been fully cleaned at NFC. Yesterday's disposals look sensible, but further pruning may be needed on the Continent, where losses climbed from pounds 4.5m to pounds 5.3m in the half year. And while profits were up a strong 12 per cent to pounds 39.1m in the UK, the decision to relinquish three large yet unprofitable contracts with Whitbread, Homebase and Boots suggests the market remains tough. Indeed, NFC has lost as many contracts as it has won in the home market of late.

The question is what the group will now do with the net cash of pounds 168m it will be left with after the disposals and reorganisation. It will be ungeared by the year end and Sir Christopher would be comfortable spending up to pounds 200m on expansion in automotive parts, electronics and consumer goods in expanding markets such as North America and Asia, where NFC is achieving growth rates of up to 36 per cent.

Management will have to tread extra carefully to avoid the wild spending spree in Europe at the turn of the decade which led to many of the current problems. Meanwhile, the Chancellor's expected attack on tax credits could cut the windfalls NFC has been gleaning from its overfunded pension scheme.

Full-year profits of pounds 115m, including another pension credit of around pounds 21m, would put the shares on a forward price-earnings ratio of 13. The yield of 6.9 per cent provides solid support but the shares are not to be chased.

Heal's designer look impresses

Heal's, the Queen's favourite upmarket furnishings store, looks well placed to cash in on its London base. With City bonuses increasing, house moves in the South-east rising fast and windfall gains to come, the group's target market of 25 to 45-year-old professionals can afford to splash out on Heal's designer look.

Floated at 175p in March, the group's maiden results were impressive. Sales for the six months to March rose 22 per cent to pounds 13.2m, with like- for-like growth of 18 per cent.

This compares with around 3 per cent from DFS Furniture, which occupies the more downmarket end of the market. Heal's underlying profits rose 37 per cent to pounds 1.7m and a dividend is promised at the full year stage.

There is little left to do in London and the South. The group will spend around pounds 1m this year to finish the revamp of its flagship store in London's Tottenham Court Road and pounds 1m next year to refit the Guildford shop, which is taking pounds 100 less in sales per square foot than the pounds 360 achieved at the other two outlets.

The real test will be rolling out the brand across Britain. A similar attempt failed in the 1980s, when the group was part of Storehouse and had a dowdier image.

But with the brand now stronger, chief executive Colin Pilgrim's plans for cautious expansion - one new store a year for the next eight years - look workable. The first, in 1998, will be either Manchester or Glasgow, with Dublin, Newcastle and Leeds also planned. Mail order looks another fruitful area for growth.

There are risks. Any blow to consumer confidence would hurt and whether Heal's goes down well in the North is unproven.

The forecast by brokers SGST of profits of pounds 1.95m for the full year put the shares, unchanged at 194.5p, on a forward multiple of 17. Compared with Harvey Nichols on well over 20 times, that looks reasonable value.

Mixed outlook at British Energy

Despite the generous share options dished out by British Energy to staff and directors yesterday, the outlook for shareholders in the privatised nuclear generator is distinctly mixed.

News of the pounds 1.5bn deal to settle most of the group's outstanding decommissioning liabilities with reprocessor BNFL was encouraging, nominally adding an immediate pounds 10m to profits.

It was this, rather than British Energy's widely expected first profits, which sent the partly-paid shares 9p higher to 148p.

The after-tax surplus for the 12 months to the end of March came in at pounds 36m, up from losses of pounds 155m before. The company confirmed a total dividend for the year of 13.7p, giving a yield of 7 per cent.

British Energy has raised efficiency at its generating stations, which sell all they can produce through base load contracts.

On top, it has found plenty of efficiency savings in the shape of 1,500 job cuts, roughly a third of which have already been made. With at least three head offices, there are no doubt more savings to come.

Yet the question for investors looking for a high yield remains whether to go for British Energy, with projections suggesting a relatively lowly 5 per cent real terms growth in payouts over the next few years, or the faster-growing National Power or PowerGen.

The answer would be clear if British Energy were to use its strong balance sheet either to distribute cash to investors or make earnings-enhancing acquisitions.

But there are problems. Firstly, the gearing of 17 per cent ignores the vast pounds 3.8bn decommissioning liabilities.

Secondly, the group has, like the generators, run up against difficulties in its diversification strategy.

After the BNFL deal, forecasts have been raised from pounds 85m to around pounds 96m.

A dividend for 1997-98 of 14.5p would give a forecast yield of 7.4 per cent. Hold on.