The Private Investor: 'Bloomsbury's sales rose with the Phoenix and may keep growing':

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The Independent Online

Why can't more companies be as much fun as Bloomsbury Publishing? Since Nigel Newton, its chief executive, took a punt on a unknown author called JK Rowling six years ago, its progress has been magic. The mere mention of a new Harry Potter book is enough to send shares rocketing. Association with the phenomenon has done no harm to the children's bookshops Ottakar, and even given a boost to Waterstone's owner, HMV.

This summer, like millions of others, I have been leafing through the latest in the series, Harry Potter and the Order of the Phoenix, which broke records on pre-sales alone and is one of the biggest book successes of all time. Day-one UK sales were 1.7 million, and at the end of week two they had reached 3 million.

So ignoring the sceptics, Potter's City followers are still predicting plenty more upside yet. Amazingly, since Harry Potter mania is not exactly insider knowledge, his publisher's shares have so far failed to keep up with events, despite the rise over the past five years from 32p to about 270p.

This week, Bloomsbury beat expectations with interim profits up 13 per cent at £3.6m and earnings per share (EPS) 14 per cent better at 3.65p, with a 15 per cent hike in the dividend at 0.4p. Given that only nine days' Order of the Phoenix sales were in these figures, but nearly all the costs, the auguries for the second half are strong. Cautiously, ahead of any feel on Christmas sales, Bloomsbury's broker, Numis, is not changing the year-end forecast from pre-tax of £15m, EPS 15.1p.

Bloomsbury has been very astute, announcing a four-for-one share split just before the latest Potter launch, which is all the better for the shares' momentum.

Numis remains convinced that there is at least five years' driving power left in the Potter franchise for Bloomsbury, as the planned sixth and seventh books are released. But most important of all, the publisher is ensuring that there is life after Potter.

While more than half revenues and probably more of profits come from Potter, the book portfolio is a balanced one. First-half highlights included Donna Tartt's The Little Friend and Ben Schott's Schott's Original Miscellany, which was number one on the best-seller list for 37 weeks. There was a major launch of new titles, estimated levels of new investment rising by 13 per cent to £13m.

Bloomsbury is building a US business; it has a growing reference division, and has bought a leading publisher in Germany, the world's second largest book market. It could still have £29m cash at year-end for further diversification. With its expertise in children's books, the 117-outlet Ottakar group has been another gainer from Potter Five. It has had its ups and downs since going public in 1998, but seems to be on an up now.

It is a well-managed business, with a good growth story, and has been delivering rising like-for-like sales as well as making sound acquisitions. Last year it bought the eight James Thin stores, and this year added 30 per cent to its selling space with 24 Hammicks shops. Ottakar avoids major cities, targeting the smaller towns where it can take ground from independents and attack Waterstone's and WH Smith.

Last year, Ottakar's EPS grew by 35 per cent to 17.2p. This year the broker Evolution Beeson Gregory is looking for a 46 per cent rise to 25.1p, and for at least 29.7p in 2005. Its book market share is only 7 per cent, and with gearing around 50 per cent it has the space and capacity for further growth.

Books flew off the shelf, too, at Waterstone's, with the company claiming 10 per cent of the new Potters sold on day one. HMV has been shaking up the book chain, and in the first half improved from 5.4 to 5.9 per cent. The aim is to catch up with the music side's 10 per cent.

While the music market had been looking pretty lousy, HMV has quickly become market leader in highly popular DVDs. For that reason, and Waterstone's recovery, the broker Teather & Greenwood's forecast of a rise in EPS from 17.1p to 18.3p this financial year could be bettered.

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