The Week in Review

Spinster Alliance & Leicester could get left on the shelf
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The Independent Online

BG Group

BG Group has weathered the past year's downturn in energy prices better than any of its rivals in the oil and gas sector.

The production business of the old British Gas has ambitious targets to raise output by 11 per cent a year, and the high share price leaves no room for disappointment.

Geopolitical risks increase the further abroad BG travels, while at home the Chancellor is to harvest an extra £40m a year from BG through extra tax on profits from the North Sea.

BG shares have been defying gravity for months. Why? Economic uncertainty means investors are willing to pay a premium for visible future earnings from a trustworthy company. They also reckon BG would be snapped up by a rival if its shares fell very far. With BG's return on capital well below the industry, that might turn out to be a pipe dream. Take profits.

Chrysalis

Nourished by the Communications Bill earlier this week, Chrysalis is set to emerge as one of the most brightly coloured butterflies of the media sector. Its portfolio of metropolitan FM radio stations, including Galaxy and Heart, makes it one of the most attractive consolidation plays in the industry.

The radio division saw only a 3 per cent fall in revenue in the past six months, against an industry average decline of 12 per cent. The latest listening figures from Rajar showed year-on-year audience growth of 12.6 per cent, with Heart particularly strong. The shares look expensive, but that reflects the recovery and consolidation prospects. Hold.

Morse

Those who inspect the fortunes of the tech sector were given hope from Morse. The company – which sells, installs and maintains computer equipment – pointed to a slight improvement in trading in the first three months of 2002. That was the third quarter to be better than the last.

It said there was a slight improvement in spending from its telecoms customers and that sales of hardware and the like, where it competes with Computacenter, were better than it had hoped for. It also reckons it has gained market share.

Reckitt Benckiser

Reckitt Benckiser has certainly polished up its act since the household goods group was formed in 1999. The "new and improved" company has delivered sparkling results by getting steady stream of "best ever" products on supermarket shelves around the world. Improvements to the group's Finish and Calgonit dishwashing products, for instance, have sent customers diving for their wallets.

Reckitt has a store cupboard full of such plans to drive growth. These include focusing on 15 "power brands" which will soon account for more than half of the group's sales. Central to this will be a single global name for each brand – hence Immac depilatory cream, as it is known in the UK, will be renamed Veet.

After such a strong run by the shares, there is no harm locking in some gains, but even now the company's valuation lags behind those of its US peer group. The shares remain a core holding.

Incepta

"Robust figures in the face of a challenging market for financial public relations and advertising services." "Swift action to cut costs leaves business in a strong position to benefit from any upturn." "Optimistic signs of an upturn, but planning for the coming year on a prudent basis."

This was the spin being put on this week's dismal results from Incepta. The group – which owns City spin doctors Citigate Dewe Rogerson – made a disastrous £30m acquisition of a technology marketing company on America's west coast just after the peak of the tech boom.

The coming year looks like being another hard one but UK flotations could just be picking up. Incepta already has lucrative advisory roles on the forthcoming Homebase and Yell floats. Investors with a gambling streak should buy.

Big Yellow

Moving house? Flat too small? Then you're likely to need somewhere to store your clutter. Somewhere like Big Yellow, which provides you with storage space for a monthly fee.

The company plans to open 50 big, yellow warehouses. It is only half way there. While the company trumpets its strategy of locating warehouses prominently on main roads, local councils find the huge yellow boxes more of an eyesore than eye-catching and are reluctant to grant permission. So acceptable sites in the South East, its target market, are few and far between. There won't be a profit until 2004. There seems little to move the stock in the next 12 months. Avoid.

Bett Brothers

Bett Brothers could be heading south, but its share price sure isn't. The Dundee-based builder has reinvested recent windfalls wisely and has scope to push into new areas, such as Yorkshire and the Midlands.

The number of housing completions is growing faster than expected, and there should be a steady stream of one-off profits from its commercial property side over the coming two or three years.

Its old conglomerate status and low margins have kept Bett's shares low. But these issues are being addressed, and the company's northern bias shields it from fears the south-east England housing bubble could burst. Buy.

NMT

There are many investors who suffer from needlestick injury. This is the stabbing pain felt when looking at the share price of a medical devices company which has struggled to develop safety syringes with retractable needles. Legislation in the US that was supposed to turn safety syringes into a mass market product is failing to deliver, NMT says. Hospitals are required to consider buying safety syringes, but there is little enforcement of the law. It is still not the time to put your trust in NMT.

The above is a selection of recommendations from this week's daily investment columns

* ALLIANCE & LEICESTER Could get taken over any day now. Legislation which shielded the old building society from hostile bidders expired late last month, on the fifth anniversary of flotation. That will put pressure on the management – particularly the chairman John Windeler and his soon to be promoted finance director, Richard Pym – to give serious consideration to approaches from a queue of suitors, headed by Abbey National, but also including National Australia Bank, Lloyds TSB and Barclays.

Or so the theory goes. In truth, such a marriage is not as likely as the market seems to think. Abbey and NAB are tied up with internal problems, while the other pair have international, rather than domestic, ambitions – and the Competition Commission is always on hand to put the kibosh on consolidation.

So what happens if A&L continues is spinsterish existence? Its not a particularly ravishing investment proposition, if news from its annual shareholder meeting this week is anything to go by. The bank said that gross mortgage lending grew at 7 per cent in the first quarter, over the same period in 2001, in a market as a whole that grew 37 per cent. That is a significant loss of share by any standards. A&L's credit card lending was up 8 per cent in a market that probably grew in double figures. The group said revenue growth was more than 5.1 per cent in the quarter, giving it a good head start on its target of 4 per cent for the full year. But investors will recall that the annual revenue growth target was set at 6 per cent less than a year ago, only to be the subject of an embarrassing volte-face late last year.

It now looks as though A&L could well meet its targets this year – an outcome that few in the City were originally predicting, But this is down largely to the astounding willingness of the consumer to load themselves up with short-term debt and to pursue mortgage deals on eye-poppingly expensive houses. None of that is forecast to continue at the current rate.

A&L is right to reject business that bolsters its market share at the expense of shareholder value. And it is doing laudably in making cost savings throughout the business. It also has a handy dividend yield of more than 4 per cent.

But its ambitions are modest while its shares are priced at an immodest premium to the rest of the banking sector. A takeover by Abbey National would yield the most obvious cost savings, but even it would find it hard to justify paying £10 a share. The downside, if a bid is not forthcoming, is too great to make A&L worth the risk. Cautious investors should sell.

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