9 - 15 September 1999

Investors' Corner

The Market

Leading shares in London closed higher on Friday, as weak US employment data soothed fears of an imminent rate rise in the US. News that NatWest is in talks to buy Legal & General for almost £11 billion in cash and shares underpinned sentiment, with the heavily-weighted financial sector the scene of frenzied bid speculation. The FTSE 100 index of leading shares ended the week 136.5 points higher at 6332.1. Confirmation of talks between NatWest and Legal & General ensured a healthy opening for the FTSE, but the tone remained cautious as traders fretted about what US employment report might bring.

Leisure, Entertainment & Hotels

Hilton

Hilton, the hotels and gaming group, has announced its results for the six months to June 30. Pre-tax profits fell 73 per cent to £33.6 million. Operating profit on retail betting fell to £40.1 million as margins came under pressure and ante-post wins accounted for an extra £3 million. The forced sale of Corals generated an exceptional profit of £37 million. Hilton has to follow the lead of independent rival Victor Chandler and transfer its telebetting operations to the overseas tax haven of Gibraltar.

Hilton also announced that it plans to sell its American gaming and betting businesses, which include operations across the US, Argentina and Brazil. Hilton's chairman reported that the group has initiated an investment programme of £16million over the next few months to bring some properties up to full Hilton brand standards. From the autumn of 1999, all UK hotels will be branded Hilton, leading to a public launch in the spring of 2000. By the end of 1999, all systems common to Hilton Hotels Corporation and Hilton International, including the new Hilstar reservation system, will have been fully integrated into the expanded UK portfolio.

The group's chairman argued that the emphasis of Hilton's development programme is now on Continental Europe and the Far East. In total, 29 hotels are already scheduled to open by the end of 2000 and a further 14 by the end of 2001. Expansion will be achieved both by signing additional management contracts, and by acquiring individual hotels - as well as local and regional hotel companies - where they meet the group's criteria. Day to day responsibility for development now rests with the regional management teams, while the central team retains responsibility for major transactions.

In betting and gaming, the group recognises that rapid technological change is removing many traditional historical and geographical boundaries in betting and gaming and Hilton is determined to have a leading presence in each of the new distribution channels that are being created. In Gibraltar, the group is creating a new call centre enabling it to offer betting services to UK clients later this year.

Hilton will be launching a sports betting Internet site, www.ladbrokes.com, for the international customer next year. In the UK, a sports betting Internet site, www.bet.co.uk, will be launched in late 1999 aimed initially at football betting and this will be actively advertised and promoted to UK customers. The site will be expanded to horse racing and other sporting events in 2000. Hilton is in discussions with service providers on the next stage of technological development - interactive television. The UK casinos are expected to be rebranded as Ladbroke casinos during the coming months.

Support Services

Bunzl

Bunzl, the paper and plastics products supplier, reported modest turnover growth and a 13 per cent increase in pre-tax profits to £70.7 million for the half-year to June 30. Bunzl's outsourcing services performed exceptionally well in both North America and Europe with strong contributions from recent acquisitions and good continuing organic growth. Operating across North America, Europe and Australia, Bunzl is a leading supplier of outsourced food packaging, disposable supplies and cleaning and hygiene products for supermarkets, caterers, hotels and contract cleaners. Its largest and most successful business area achieved another excellent set of results with profits up 17 per cent on sales up 11 per cent. Profits rose as operating costs were further reduced and as a loss making acquisition, the grocery supply business of Xpedx, started to contribute and both it and Provend were integrated into the group. Good underlying organic growth and a small favourable currency movement more than offset price deflation.

Meanwhile, in North America, following three years of price deflation as prices of both plastic and paper based products fell, there were substantial price increases on many products in March and during the second quarter. For the period as a whole, however, average prices were lower than in the first half of 1998. The group had continued success in growing the business organically by being the preferred supplier of outsourced disposable packaging for customers who are attracted for Bunzl's specialist knowledge, efficient service and competitive prices. The end market continues to grow as lifestyle and retail trends lead to greater demand for Takeout Foods.

In Europe significant new business was won, for example with contract caterers and with retail chains both for staff canteens and in-store packaging products. This strong organic growth both in the UK and mainland Europe indicates the continued success of Bunzl's partnership approach with both customers and suppliers. The wholesale supply of disposable products and vending ingredients to the catering and vending industry has been integrated with ACS Whittaker and the product range and customer base are now on the group's IT system.

The vending business, Provend Services, which services, supplies and operates vending machines dispensing drinks and snacks to staff in offices, commercial buildings and retail outlets, is now operating largely as a stand alone business while benefiting from synergies in purchasing and with key accounts. The acquisition has brought Bunzl a substantial additional disposables supplies business in the UK and a leading player in the closely related vending sector with particular strengths with the major retailers.

In the UK and Ireland, Bunzl remains one of the largest independent fine paper merchants distributing a wide range of high quality printing, writing and copier papers primarily to printers. Sales were up 4 per cent reflecting impressive double digit increases in the volume of paper distributed. This was largely negated by the continued high level of deflation, with the first price rises coming too late to impact the period. Margins suffered as deflation took its toll with the profits increase held back to 1 per cent. Prices of uncoated paper rose slightly in June and, with supply lines tightening for certain grades, steeper rises are expected for both coated and uncoated papers in the autumn. These rises are expected to mark the beginning of the end of the current deflationary period which has lasted well over three years reflecting both the global supply/demand balance for paper and pulp and also the strengthening of sterling against the German mark and then the euro. Bunzl expects to see continued growth in the supply of specialist products, such as digital papers, for particular markets.

Oil & Gas

Cairn Energy

Cairn Energy, the oil and gas explorer, appears to be on track for a good performance in the second half of the year. The group reported a profit of £11.2 million on a turnover of £30.1 million. Cairn has little or no influence on oil or gas prices and consequently focused its efforts on strategic acquisitions or alliances and organic growth from exploration. In recent months there has been a substantial recovery in the oil price and Cairn's acquisition of an increased equity interest in the Rajasthan Block in India has been rewarded with the encouraging results of the Guda-2 well. If oil prices maintain their current levels, it should benefit second half profitability. The average oil price realised for the first half of 1999 was $12.58 per barrel compared with $14.96 for the equivalent period in 1998. The group made a net profit of £7.7m against a loss of £6.1m for the same period in 1998. Cairn has net cash of £20m, and with substantial cashflow has the financial strength and flexibility to pursue further opportunities in its core strategic areas.

In Bangladesh the offshore drilling programme is about to commence. Negotiations continue with the Bangladeshi authorities in respect of PSCs for Blocks 5 and 10. Relinquishment patterns for Blocks 15 and 16 have been agreed (the contracts required a 25 per cent relinquishment of Block 15 acreage and a 50 per cent relinquishment of Block 16 acreage), with Cairn/Shell retaining those areas the alliance believes are most prospective.

India continues to be a core area for the group and Cairn has increased its equity interests in existing acreage positions. In addition, Cairn has submitted applications for three Blocks offshore Eastern India pursuant to India's New Exploration Licencing Policy. In Eastern India, a 3D seismic survey will commence in the last quarter of 1999. The survey is designed to provide full Block coverage for future field development and also identify prospects for forward exploration drilling programmes. Gas Authority of India is upgrading the pipeline at the Ravva facility, which Cairn hopes will facilitate additional gas sales from the Ravva contract area. At the Guda-2 well, Cairn is evaluating the opportunity for an early production system and is planning an accelerated exploration programme on the Block. At Block CB-OS/2, Cairn plans to commence seismic acquisition in the second half of the year.

With the restructuring process now complete following the transfer of operatorship to Shell, Cairn looks forward to entering the new Millennium as a slimmed down organisation, focused on its core technical and commercial skills and with the ability to leverage value from material exploration and production interests. Cairn believes that the group's position in the Indian subcontinent offers substantial upside potential. The Indian market has a substantial energy deficiency and requires additional hydrocarbons, either from indigenous production or through imports. A sound balance sheet and contractual protection against oil price downside affords maximum flexibility in considering future options.

Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.

James DeBono can be contacted by e-mail: JamesDeBono@CompuServe.com