The Investment Column: Hold on to Brambles as pallet business returns to form

Time to share in 200-year-old broker Hichens' success story; Buy IQE before the herd instinct takes over
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The Independent Online

The aim is that they will replace all those disposable trays that currently cost retailers and suppliers millions and waste resources. It is a big opportunity.

As Brambles has grown CHEP into a global business, it has had to keep adapting the model to re-learn the two most important lessons: how not to lose its pallets and how to make decent amounts of money out of them. It failed on both counts soon after listing in London in 2001 but, thanks to a new pricing regime in Europe, and the increasing use of RFID (radio frequency indentification) tags, it is back on the growth trajectory it never should have left.

Results yesterday were plenty evidence of that, with the CHEP business growing operating profits by 29 per cent and the overall group profit more than trebling. One broker even suggested that management may have increased voluntary provisions to limit the extent to which the figures beat City forecasts. That means stuff in the can for next year.

CHEP is the main asset but Brambles also includes businesses in waste management (Cleanaway - which sweeps streets, collects rubbish, recycles waste and runs incineration and landfill sites), document storage (Recall) and support services to steelworks (Brambles Industrial Services). Cleanaway has had a mixed year, shouldering the higher-than-expected costs of new long-term contracts in Australia, while Recall continues to grow mainly through acquisition. It is not an especially fashionable corporate structure and disposals will probably be forced on the group if results turn sour, but for now the outlook for each of the component parts is strong.

This was underscored yesterday by the first dividend rise since the London listing (although UK shareholders have benefited from the strength of the pound against the Australian dollar, the currency in which the dividend is set). The yield, though, remains below 3 per cent, making the shares look expensive.

We said buy at 273p in November, now hold.

Time to share in 200-year-old broker Hichens' success story

Hichens, Harrison & Co, the stockbroker, is as old as the London Stock Exchange. But it only just floated on it.

The company can trace its history back to 1803 when Robert Hichens started in the City, and has survived 200 years in more or less its original shape. It floated on AIM in May, as its South African owner cut its stake, and the shares have already doubled.

Hichens wants to carve out a specialist niche working for financial services, oil and gas, and mining companies, hoping to capitalise on the boom in natural resources sector flotations. In the first half of the year, it raised £48m for its corporate clients and has also grown its private client funds under management to more than £120m.

The firm unveiled its maiden results yesterday, which showed first-half revenues surged 84 per cent to £3.2m. It posted an operating profit of £471,000, excluding the float costs.

The company has made some high-profile appointments, including Magnus Mathewson, the son of the Royal Bank of Scotland chairman Sir George Mathewson, as banking analyst and Martin Lampshire, who was poached from Charles Stanley, as head of corporate sales. This augurs well for generating new business in the coming months.

And with a new office in Jakarta, Indonesia, which is to serve as the firm's Asian hub, and plans for acquisitions, Hichens is well-positioned to grow further. At 105p, the shares are a buy.

Buy IQE before the herd instinct takes over

IQE, a Cardiff-based producer of the silicon wafers that microchips are made from, was floated in London in 2000 and in the September of that year its shares hit 680p. They closed yesterday at 9p.

There would seem little obviously to recommend them. The market is littered with former tech stars that have struggled to climb out of the red and whose business models have been found wanting. IQE's latest interim results, released yesterday, showed a pre-tax loss of £2.9m on sales of £9.7m, suggesting that however hard this doughty little company might try, it is doomed to join the list of tech has-beens.

However, while the semiconductor industry has suffered since 2000 from chronic over-capacity and falling prices, the near complete destruction of all value in IQE's share price is probably an over-reaction.

Things are not that bad. Prices for its wafers, supplied to large manufacturers such as Toshiba and Siemens, have stabilised. The company has its fixed costs under control and its variable costs, mainly raw materials, have fallen from 60 per cent of its cost base to 42 per cent. This means a lot more of each additional pound in sales can be converted into profit.

Significantly, the £9.7m of first-half revenues was a 32 per cent increase on last year and, in June, the company made its first operating profit for four years. The plan is working. IQE might feel like a speculative punt now, but in six months' time it will have attracted a stronger following. Buy now before the herd.

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