QUALIPORT
Problems Facing The Qualiport

By Maynard Paton (TMFMayn)
January 2, 2003

"Almost all of the really big trouble you will experience in the forthcoming year will be in your portfolio right now."

That was the message spelled out this time last year, and one the Qualiport failed to heed. The portfolio held PizzaExpress (LSE: PIZ) at the start of 2002; by November, various difficulties and issues emanating from the restaurant group prompted a sale and a 50% loss.

So, with the PizzaExpress 'experience' still fresh in the mind, where could problems lie for the Qualiport in 2003?

Lloyds TSB

Rising bad debts, low 'solvency' ratios and falling sales of equity-linked products should provide Lloyds TSB (LSE: LLOY) with a tricky 2003. To a certain extent however, the market has already factored in profit trouble. At present, the shares (at 446p) offer a historic dividend yield of 7.6%.

In December, Lloyds TSB revealed the appointment of Eric Daniels as chief executive, who replaces the retiring Peter Ellwood in May. Should there be nasties lurking in the accounts, 2003 could see Daniels clear the decks with a 'kitchen sink' announcement. The absence of any dividend update in a recent trading statement adds to the worry.

Of all the shares in the Qualiport, Lloyds TSB looks set to provide the most company-specific anxiety. February's full-year results will prove very interesting.

Carpetright and DFS Furniture

The fate of the property market could have a significant bearing on Carpetright (LSE: CPR) and DFS Furniture (LSE: DFS) in 2003. A sudden house price downturn, or even a general reduction in consumer spending, may cause a real strain on profits at both firms.

That said, there's little either retailer can do about the economy. Indeed, with both shares on price to earnings (P/E) ratios of below 10 and offering yields of over 6%, plenty of house price gloom looks to be priced in already.

Thankfully, Carpetright and DFS are run by bosses who have ridden numerous economic ups and downs before. Recent results also suggest neither company will lose ground to rivals any time soon.

Emap

The big event at Emap (LSE: EMA) during 2003 will be the departure of chief executive Robin Miller (who, it must be remembered, steered Emap to considerable success between 1985 and 1998). Following a two-year stint to help revive Emap from the £941m Petersen debacle, Miller will step down in the summer and hand the reins over to a yet-to-be-named successor.

Apart from the general managerial talent of the new man, the forthcoming relaxation of media ownership rules could prove worrisome. Although the sector traditionally provides attractive economics, numerous media firms (like Emap) have done their best to negate such favourable characteristics through over-ambitious acquisitions. Any bold expansion plan from Miller's successor could stir trouble.

London Stock Exchange

The London Stock Exchange (LSE: LSE) is another with boardroom moves afoot. Chairman Don Cruickshank leaves in a few months time and his replacement has yet to be recruited. 

Although speculation has died down in recent months, it's no secret the LSE has been investigating various alliance/merger/takeover proposals with foreign exchanges. In 2001, the LSE came close to buying London futures exchange LIFFE in a deal that offered few clear-cut synergies, yet came with a racy £580m price tag. The LSE's war chest presently stands at £237m.

Simply put, whoever fills Cruickshank's shoes will end up with an awkward task: one of ensuring the Exchange does not get left behind in the sector consolidation, while ensuring it doesn't indulge in any daft corporate activity.

Johnston Press

Of the Qualiport's six companies, Johnston Press (LSE: JPR) probably enters 2003 the most confident. A December trading update confirmed the newspaper group's 2002 results would come in at the top end of expectations.

With the company still digesting the £560m purchase of Regional Independent Media, there's probably little chance of Johnston embarking on any further additions in 2003. Furthermore, investors don't have to worry about imminent management changes either. Local advertising has held up relatively well over the past few years, leaving a severe economic downturn as perhaps the only real danger to shareholders in 2003.

The author owns shares in Carpetright, DFS Furniture, Johnston Press and London Stock Exchange