QUALIPORT
Top Turnover Tips

By Maynard Paton (TMFMayn)
February 26, 2004

Company profits ultimately drive share prices. Although cost cutting and acquisitions can bump up earnings in the short term, there's no substitute for organic sales growth over the long haul. Such 'pure' progress is a feature of many great growth shares, such as Capita (LSE: CPI) and William Morrison (LSE: MRW).

Annual reports tell shareholders of a company's sales progress. In accounting terms, sales (or turnover) is the amount derived from the provision of goods and services falling within the company's ordinary activities (after the deduction of trade discounts and before adding VAT and other sales-based taxes). Companies are required to disclose their turnover figure in their main profit and loss account.

(Note that, due to the nature of their business, banks and other financial organisations follow different accounting guidelines and do not present a turnover figure.)

Also, the Companies Act requires a breakdown of turnover in the accounting notes should the group have more than one class of business and/or its geographical markets differ substantially. (However, this disclosure can be skipped if, in the opinion of the firm's directors, it would be 'seriously prejudicial to the interests of the company'.)

The following is taken from Emap's (LSE: EMA) half-year results:

Six months to Sept 30	2003 (£m)	2002 (£m)
Turnover	509	477
Analysis of turnover:
By category:
Advertising	213	211
Circulation	216	204
Events	34	28
Other	46	34
By geographical origin:
UK	328	320
France	158	135
USA	11	11
Rest of the World	11	11

Turnover therefore improved by £32m, or 7%, to £509m in the reported period. From the breakdown, it's fair to say additional circulation revenues in France helped the media group's top line.

Watch list table

As always with accounting, there's more to evaluating sales growth rates -- and their purity -- than meets the eye. Just comparing the latest profit and loss figure to that of the year before can sometimes prove misleading. For example, the next table lists the 17 portfolio watch list shares and their latest reported increase in sales:

Company	Period	Sales growth (%)
Imperial Tobacco (LSE: IMT)	Year to 30 Sep 2003	38
Johnston Press (LSE: JPR)	Half year to 30 Jun 2003	28
Games Workshop (LSE: GAW)	Half year to 30 Nov 2003	24
Halma (LSE: HLMA)	Half year to 4 Oct 2003	19
Renishaw (LSE: RSW)	Half year to 31 Dec 2003	14
Ulster Television (LSE: UTV)	Half year to 30 Jun 2003	14
DFS Furniture (LSE: DFS)	Year to 2 Aug 2003	8
Emap (LSE: EMA)	Half year to 30 Sep 2003	7
Gallaher (LSE: GLH)	Half year to 30 Jun 2003	5
Rotork (LSE: ROR)	Half year to 30 Jun 2003	2
GlaxoSmithKline (LSE: GSK)	Year to 31 Dec 2003	1
Associated British Ports (LSE: ABP)	Year to 31 Dec 2003	0
London Stock Exchange (LSE: LSE)	Half year to 30 Sep 2003	0
Scottish Radio (LSE: SRH)	Year to 30 Sep 2003	0
Carpetright (LSE: CPR)	Half year to 1 Nov 2003	-1
Capital Radio (LSE: CAP)	Year to 30 Sep 2003	-4
Metal Bulletin (LSE: MTLB)	Half year to 30 Jun 2003	-8

Some chunky improvements there. However, factors influencing the performances include:

* Acquisitions: The figures for Halma, Imperial Tobacco, Johnston Press and Ulster Television were all boosted by acquisitions. Accounting standards recommend that when an acquisition is completed during the period under review, the additional turnover is disclosed separately. Note though that subsequent profit and loss accounts do not have to differentiate between 'existing' and 'acquired' sales. Recent figures from Halma provide a good example:

Year to c31 March	2003          (£m)	2002        (£m)
Turnover:
Continuing operations	252,159	267,597
Acquisitions	15,134	-
	267,293	267,597

Half year to c30 September	2003        (£m)	2002         (£m)
Turnover	146,900	123,846

Group turnover for the year to March 2003 appeared to keep steady at £267m, although £15m was generated from the purchase of BEA. The subsequent interim statement then showed turnover up 19% to £147m. Of course, Halma had enjoyed a full six-month contribution from BEA -- unlike the comparable period in 2002 -- and didn't have to disclose the fact in the profit and loss account. Further investigation showed 'underlying' turnover was flat. Read more.

(And beware the company that acquires a business, but never reveals its turnover contribution. Read more.)

* Disposals: The same accounting standards apply with discontinued activities as they do with as acquisitions, though companies this time do their best to highlight 'continuing turnover' progress for obvious reasons. Firms on the watch list that have witnessed group sales suffer from disposals lately are Associated British Ports (LSE: ABP) and Scottish Radio (LSE: SRH)

* Items included as turnover: The following is extracted from Gallaher's half-year figures:

"Total turnover for the first half of 2003 at £4,325m represented an increase of 5.0% compared with 2002 H1, with cigarette volume sales - of 73.7bn sticks - up 5.2%. Turnover excluding duty ('net turnover') grew 9.4% to £1,752m (2002 H1: £1,603m)."

Half year to 30 June	2003      (£m)	2002      (£m)
Group turnover including share of joint ventures and associate	4,325	4,120
Less share of joint ventures and associate	(502)	(459)
Group turnover	3,823	3,661
Duty	2,573	2,517

Gallaher's total turnover includes contributions from joint ventures, an associate and government excise duty levied on its cigarettes. Nothing wrong with that, but shareholders must be aware these items could distort the group's top line progress. By their very nature, joint ventures and associates tend to be peripheral activities whose sales performances may not run in tandem with that of the main business. Also, for instance, if the duty on tobacco is raised and Gallaher passes it all on to the customer, can the company be said to have really increased its turnover?

Sales stars

Two watch list shares stand out from the earlier table: Games Workshop and Renishaw. Sadly, the latter's recent sales jump was more of a rebound. Though up from £52m to £59m during the six months to December 2003, sales actually fell from £60m to £51m in the six months to December 2001.

That leaves Games Workshop as the sole watch list sales star. Its recent results, which highlighted the 24% leap in turnover, continued a fine tradition at the wargames company. Since the group's flotation in 1994, revenues have improved every year, compounding at 20% per annum on average. What's more, organic growth has supported Games Workshop's development: only a handful of very minor acquisitions have been made during its listed history.

Additonal stores in America supported the latest 24% revenue improvement, though new Stateside infrastructure restricted operating profit growth to 'just' 12%. The dividend was lifted a measly 5%.

Still, 'organic growth' companies do tend to attract a premium rating and Games Workshop is no exception. Applying the same free cash assumptions made previously, Games Workshop generated 35.9p per share of free cash in the twelve months to November 2003. Demanding a 7.5% free cash flow yield thus requires a 479p buy price. The shares presently trade around the 715p level.

Where next? FREE Annual Reports| Games Workshop Annual Results 2003

The author owns shares in Carpetright, DFS Furniture, Games Workshop, GlaxoSmithKline, Halma, Johnston Press and London Stock Exchange.