Investment: Menzies profits set to drop

JOHN MENZIES, the news and logistics business, yesterday warned full-year profits would drop in 1999 because of management and systems problems which have hampered its attempt to refocus the company.

Warburg Dillon Read, the house broker, is predicting a fall in profits from pounds 34m to pounds 28m in the year to April because of a big reorganisation in its entertainment distribution arm, Total Home Entertainment (THE).

Menzies is taking a pounds 15m exceptional charge to write down large quantities of unwanted stock at THE and replace a warehouse computer system which had become outdated.

The group has gone through a phase of radical change in the last two years as David Mackay, chief executive, has sought to exit the retail sector and concentrate on wholesaling and logistics.

The strategy is to expand its airport business of cargo handling, trucking and passenger handling, while maintaining its position in newspaper and magazine distribution.

The John Menzies chain of newsagents was sold to its old arch-rival WH Smith last year, but the group is keeping one retail operation, the loss- making Early Learning Centre. Menzies hopes to return ELC to profit and sell it on within five years.

Group pre-tax profits rose from pounds 0.2m to pounds 3m in the six months to October as Menzies eliminated losses at the chain of newsagents. Excluding this, profits fell from pounds 7.6m to pounds 4.8m. The interim dividend was held at 4.8p.

Mr Mackay said: "The process of change is progressing well. Our good progress may have been temporarily overshadowed by the unacceptable situation at THE, but that is being tackled urgently and vigorously."

THE, which distributes videos, CDs, books and games, saw sales and profits reduce as it lost two big contracts with WH Smith and Boots.

Executives yesterday admitted they had "got it wrong" at THE. The range of CDs and videos was too wide, and too much stock was being returned. Only the games business prospered, owing to an exclusive contract to distribute games for the Nintendo 64 entertainment system.

Losses also increased at the Early Learning Centre as it exited from nursery and childrenswear. Menzies said changes were yet to feed through to results.

Like-for-like sales were up 1.4 per cent at the half-year stage, their first increase in three years. Executives said trading in the two weeks before Christmas was 18 per cent up on the year before.

Mr Mackay has now appointed Iain Callaghan, who heads the group's wholesale division, to shake up THE, while retail director Dermot Jenkinson will step down as an executive director. James Bennett, financial director, will retire due to ill health.

Menzies has succeeded in expanding its transport services, cementing a partnership with Lufthansa to launch the London Cargo Centre in July.

The launch was marred by industry-wide problems such as the Asian economic crisis and difficulties at Hong Kong airport, which depressed revenues at airports. But new contracts have now been won with Qantas and EVA, the Taiwanese airline. Last month, the group announced further business at Manchester airport. The company denied rumours it was interested in bidding for Servisair, the rival logistics group.

Shares closed up 4p yesterday at 367.5p, valuing the group at pounds 205m and putting it on a forward multiple of 11. Analysts said the shares were fully valued.