View from City Road: Forte's moves may be too little too late

Forte sold the bulk of Gardner Merchant, its contract catering subsidiary, in December but it kept the kitchen sinks for its 1992/3 results.

The pounds 257m disposal profit on Gardner not only funded the dividend but provided a smokescreen to make pounds 61m of assorted exceptional trading charges and a pounds 91m item to cover future losses on its US Travelodge hotel disposals and other property provisions.

The sale proceeds and a small post- Gardner attributable profit also helped to keep Forte's borrowings and balance sheet on a relatively even keel. Despite a pounds 344m downward valuation of property, gearing rose by only 4 points to 48.4 per cent.

Forte's first dividend cut for 20 years marks a welcome move to impose financial discipline. An upturn in the economy or a significant influx of American tourists will not come to the company's rescue.

But the move looks to be too little too late and is accompanied by a sizeable dollop of fudge. The enhanced scrip alternative, which stands to reimburse shareholders for their reduced dividend, is a disguised mini- rights issue. A repeat is unlikely next year, when the brunt of the dividend cut will be felt.

Until now the board, headed by executive chairman Rocco Forte, has taken far too cavalier a view of trading prospects and the group's ability to pay for a hectic refurbishment programme, which would excite the admiration of Jacques Attali.

Last year, Forte generated enough money to meet interest costs of pounds 129m and dividend payments of pounds 78m with pounds 38m to spare. But then there was pounds 196m of spending on revamped buildings, furniture and fittings and a pounds 95m excursion into motels in France and Italy.

The gap was filled by a net pounds 297m of disposals, including the sale of Gardner Merchant, a move that was unconvincingly described at the time as a strategic shedding of 'non- core' activities.

These figures are somewhat at odds with Forte's claim that its operational cash flow, after paying interest costs and dividends, is enough for ongoing investment. In reality there was an underlying cash outflow of pounds 100m from Forte's continuing businesses.

Profits will improve this year and capital spending will be cut to pounds 140m, but Forte is relying on saving up to pounds 60m through shareholders opting for its enhanced scrip alternative to balance the books. Failing that, it will seek more 'non-core' disposals.

Stirrings in tourist bookings and recent cost savings could take Forte's pre-tax profits up from an underlying pounds 72m to pounds 100m in the current year, just enough to cover a maintained 7.5p dividend. But a p/e of 20 and a yield of 5 per cent looks too hopeful.