2 - 8 December 1999

Investors' Corner

The Market

On Friday, shares in London closed a volatile session at another record high, with the fun beginning from the outset, with the shock merger between media titans United News and Carlton Communications and the increased NatWest offer from Bank of Scotland. The FTSE 100 index ended the session at a record 6684.8, up 2 points on the day, but off a new intra-day high of 6743.1, and well above the low of 6654.4.

The enthusiasm from these two deals could not be sustained as profit-takers moved to lock in gains as analysts digested the details of Bank of Scotland's offer and concluded that perhaps they were not as generous as first thought. Although Carlton, United News and Media clung to earlier gains, weakness in FTSE 100 heavyweights Vodafone AirTouch and BP Amoco dragged the leading index lower as the Wall Street factor returned after the Thanksgiving holiday.

TBI

TBI became a pure-play airport operator after the sale of its property arm in May 1999. The £86 million acquisition of AGI in late September added 32 airports to the existing four. TBI's chief executive claimed that the continuing airport operations generate superior returns and represent the future for the group.

TBI had planned for the abolition of duty-free shopping and its effect was limited, not surprisingly, given that duty free revenues accounted for only some six per cent of the combined turnover of Belfast, Cardiff and Stockholm (the airports affected by the abolition). There is also potential to increase traffic and indeed, during the period, there were passenger increases of 15 per cent at Belfast International Airport and 5 per cent at Cardiff International Airport. This is consistent with performance in earlier years and reflects the strong demand for services at these airports, as well as the market share opportunities, which are considerable. As with the commercial side, there remains very considerable potential to grow traffic income.

TBI has retained all land and buildings located at its airports, including option land, and continues to be confident of the medium term development potential of such property. The integration of AGI into the enlarged group is going well. The substantial planned cost savings have been and continue to be made, and this business is now focused on earnings and improving performance. AGI has been awarded the 20-year concession for the international airport at San Jose in Costa Rica. This is a significant and exciting opportunity in a country with close links to the United States. The contract is expected to become operational by March 2000.

The prospects for TBI's airport businesses are good and the group has the technical skills, depth of management and financial firepower to grow the business organically and through acquisition. Shareholders should be assured that TBI has created the right framework for sustained growth and that enhancement of shareholder value remains its overriding objective.

Energis

Energis, the telecommunications group, continues to grow strongly, doubling Earnings Before Interest Tax Depreciation and Amortization (EBITDA) and breaking even at the EBITA level for the first time. Together with Planet Online, Energis now has a leading position in advanced data, Internet and e-commerce business services. Energis is now seen as the leading alternative to BT in the UK business telecommunications market.

During the first half of this year, Energis made it clear that its focus is now on Continental Europe, as well as the UK. Acquiring Unisource Carrier Services (now re-named Energis Carrier Services) gave Energis its European entry framework with a 12,500 kilometre network connecting 13 business centres in 11 European countries, together with access to local interconnect rates, licences and points of presence.

Through EnerTel, acquired this month, Energis has started filling-in its European presence. EnerTel is the equivalent in the Netherlands to Energis at an earlier stage of development.

Between now and the end of this financial year, Energis is expected to create an additional 45 network break-out points, bringing the total to 65. It is also expected to double the number of its metropolitan area networks, bringing on-stream new networks in Edinburgh, Glasgow, Basingstoke, Bracknell and Reading. Energis shall continue to roll-out local area networks next year, including the West End of London.

At the same time, it is expected to increase the differentiation and competitive advantage of its service range, especially with the acquisition last week of Datarange with its network integration skills; the stake that Energis has taken in GEO Interactive Media with its Emblaze Internet video technology and the launch of Planet's new e-commerce platform.

In Europe, Energis has now completed ECS' first SDH ring and will have completed its second ring by February next year. Both run at 2.5 gigabits and can carry its full data and Internet provider service portfolio. They can be enhanced to 10 gigabits.

Creating 65 UK network break-out points will bring Energis' current network within 8 kms of 50 per cent of its target corporate market, compared with 37 per cent at present. The current five metropolitan area networks provide direct access to 15 per cent of Energis' target market. The additional five Energis built and wholly owned City networks will increase this to 25 per cent, further cutting access costs. The initially estimated cost of 10 metropolitan area networks to be built by Metro Holdings over five years was £100 million. This programme is now expected to cost £60 million, as a result of lower dig and electronics costs.

Energis basic services have increased 39 per cent, driven principally by the expanding reseller market and growth in international sales, which include most revenues from ECS. Excluding ECS revenues, basic services increased by 29.2 per cent. Advanced services increased 41 per cent benefiting from growth in Energis' core added value offerings and new services. Internet and related services grew faster, rising 163 per cent. This was largely due to the substantial growth of Internet traffic, including Freeserve, and Energis web hosting services. Energis operating cash inflow was £45.4 million. Meanwhile, in June 1999 Energis issued approximately £250 million of high yield bonds this was initially used to temporarily pay down indebtedness under its £500 million bank facility. These bonds improved Energis' future financial flexibility. Net debt increased from £231.0 million at 31 March 1999 to £359.7 million at 30 September 1999 and, as a result, gearing (net debt: total book capitalisation) was 51.7 per cent.

Given Energis' current earnings profile or lack, of it makes its shares a highly speculative investment with a huge potential upside.

Sainsbury

Sainsbury, the supermarket chain, has reported a 30 per cent decline in profits to £297 million for the six months to October 16. Despite these disappointing results, the group's chief executive argued that Sainsbury has made real progress with the six priorities it set itself for Sainsbury's Supermarkets in June. The business is now undergoing an extensive programme of change. Trading in the second half is dependent on the crucial Christmas and Millennium periods. The group remains confident of meeting their target of positive like-for-like sales growth by the end of this financial year.

Notwithstanding the results, the group has made good progress in changing Sainsbury's Supermarkets and driving it offer forward. Sainsbury's Homebase, Shaw's and Sainsbury's Bank are well placed for strong profit growth. The group's prospects in e-business are exciting, with its link with LineOne as the first step to providing a range of benefits for customers and shareholders.

Sainsbury's Supermarkets operating profit was adversely affected by the gross margin investment in price, as well as the investment of £20 million on rebranding and top line growth initiatives going forward. The plans announced in June to restructure the economics of its business, improve its stores and change the way it works are now underway. The costs savings target of £50 million, before associated costs of £30m is expected to be achieved.

Homebase's operating profit declined by 23.7 per cent to £36.8 million due to the lack of Easter in the first half and other seasonal trading differences, combined with a heavy initial investment of gross margin and advertising to drive sales. Over a comparative 12-month period, Homebase is well positioned to produce strong like-for-like sales performance, market share growth and an operating profit increase. The previously announced reduction in the cost base of the business has now started, underpinning the profit improvement.

In e-business, Sainsbury has already announced costs of £30 million arising this year relating to the development of this plan. Of this, around £15 million is likely to be portal costs for 'food & drink', with £7 million for the 'home & garden' portal. Costs of £8 million will be incurred by the company's Orderline activities this financial year. The future level of on-going operating costs will depend on the volume of users.

In Sainsbury's Shaw/Star Markets the improvement in performance from the Connecticut stores coupled with strong sales growth contributed to operating profit growth excluding Star Markets of 26.0 per cent in the first half. Meanwhile, Sainsbury's Bank reported operating profits of £0.9 million for the first half, an improvement of £4.5 million over the previous year.

Last month, Sainsbury acquired an additional 55 per cent of Edge, an Egyptian supermarket chain. Edge operates 94 neighbourhood stores in the Cairo area. The initial consideration was £29 million, with a further potential performance related payment. Sainsbury now owns 80.1 per cent of the ordinary share capital and this acquisition gives the group a leadership position in Egypt.

Sainsbury is expecting strong millennium demand to deliver positive like-for-like sales by end March 2000 and analysts expect full-year profits to reach £750 million.

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