The Week In Review: GE security venture a winner for Smiths
Saturday 03 February 2007
Smiths Group shocked the City last month when it announced the sale of its aerospace division to General Electric for $4.8bn. It promised to return £2.1bn of the £2.5bn proceeds to its shareholders and said it was considering the creation of a joint venture that would combine its detection business with GE's homeland security operations.
The disposal makes sense given the appreciation in the value of aerospace assets. The news sent Smiths shares soaring - now up nearly 30 per cent in the last six months. But there are some risks. GE is paying in dollars for the business, which leaves Smiths shareholders exposed to any further falls in the value of the US currency. A one cent movement in the exchange rate moves the value of the deal by £12m, worth 3p on Smiths shares.
In comparison to the dramatic news from Smiths last month, this week's trading statement was a rather muted affair. In fact, the performance of the company's medical division was slightly disappointing. This unsettled some analysts, because the business is meant to be the most stable and predictable part of Smiths. Take profits, but don't abandon the company altogether given its track record of delivering value.
The last time this column featured Britvic, the soft drinks maker had just announced a profit warning. Nevertheless, we urged investors to buy into the stock, arguing that the worst was behind the company and that it was undervalued. We were right to do so - the shares have gained 35 per cent since our May tip. This week, the drinks group issued a bullish trading statement at its AGM. It said that total revenues had risen 4.8 per cent in the 12 weeks to 24 December amid solid growth in both fizzy and non-fizzy drinks sales. Hold.
Hay fever affects 15 to 20 per cent of the population of Britain. Those who want to prevent the symptoms need to take treatments that require up to 50 injections in a year. Allergy Therapeutics is working on a formula that requires just four injections a year. And its Pollinex Quattro drug against hay fever caused by ragweed (the main cause of allergy in the US) has received the green light from the US Food and Drug Administration to go into late-stage clinical trials. Buy.
Carluccio's, the Italian restaurants group, is flourishing. The group's trendy eateries boasted this week of a 22 per cent jump in sales for the 16 weeks to 14 January. Although there was no update on margins, analysts expect them to have remained steady despite higher energy costs, rates and labour costs. Since September, the start of the company's new financial year, it has opened two new restaurants and three more are due in Manchester, Walton- on-Thames and Covent Garden. While the group's format has been a hit in the south-east of England, it is far from certain that it will enjoy similar success across the whole of the country. Now is a good time for investors to take profits.
The next 12 months are crucial for GW Pharmaceuticals: 2007 is the year when it hopes to secure both regulatory approval from the European Union for its key Sativex treatment and sign a partner for the drug in the US. The biotech can expect sales of a few hundred million dollars in Europe once Sativex is approved. This week's full-year results from GW showed it has a cash pile of £19m, so there's plenty of money to fund its development. With the newsflow due from GW in 2007 in mind, its shares are worth a punt, though they remain risky.
Travelzest describes itself as a specialist travel company. That means it offers holiday deals that you are unlikely to find on the high street for people who want something more than two weeks in Spain sunbathing next to a pool. So if you fancy touring Vietnam or Cambodia or would like to go on a naturist break to Croatia, the AIM-listed group can fix the trip for you. For the year to 31 October, pre-tax profits rose to £404,000 from £58,000 in the previous year. The figures comfortably beat City expectations. Hold.
Galliford Try's hybrid business models enable it to plough the cash generated by its construction operations into its housebuilding unit, which enjoys far bigger profit margins. Increasingly, the group is focusing on the affordable housing sector, where it has carved a niche for itself. With Galliford's management track record, the group's shares are well worth holding on to despite their 50 per cent increase during the last 12 months.
ContentFilm has transformed itself from a film production company to simply an owner of TV series and films. Today, Content owns more than 6,000 hours of TV, 800 feature films, including cult classics such as The Crow, and can comfortably say that its results this year will meet expectations because a substantial proportion of its revenues have already been contracted. Hence, it is pretty much a certainty that its pre-tax profits will reach £3m in 2007 and rise to £4m in 2008. Given this earnings visibility and the discount at which Content trades relative to rivals, its stock is worth tucking away.
There was more bad news for GCap shareholders this week. It came in the form of the latest Rajar listening figures. They showed that the radio group's flagship station, Capital FM, has well and truly lost its top spot in London to Chrysalis' Heart FM. For the fourth quarter of 2006, Capital's audience share in London stood at just 4.7 per cent - equal to the record low the station reported in the third quarter. A year ago, Capital and Heart were neck and neck with audience shares of around 6 per cent. Since then Heart FM's share has risen to 7.1 per cent, giving it 1.85 million weekly listeners, while its rival's has slumped to just 1.46 million. In January, Capital appointed Fru Hazlitt, former Virgin Radio boss at SMG, as managing director of its London operations. However, as yesterday's Rajar figures show, she faces an uphill struggle to turn the business around. Avoid.
Kingston Communications shares touched 1,579p during the dot.com boom in 2000. It is pretty safe to say that they will never get anywhere near that level again. However, in recent months the stock has enjoyed a modest rally as the Hull-based group has gone on the acquisition tail in an attempt to try to reduce its dependence on its traditional landline business. This week, Kingston made yet another purchase. It bought Mistral, an internet service provider to small and medium sized businesses in the UK for £19m. City analysts applauded the group's latest deal. Buy.
There is record demand for private jets. It comes from multinational corporations and a new class of super-wealthy individuals for whom jetting off to an exotic destination is becoming an increasingly normal way to spend the weekend. It is, therefore, not surprising to hear that business is booming at Air Partner, the world's biggest air charter broker. The company's first half earnings will be better than those seen in the previous year. In 2006, Air Partner made a record profit of £5.1m. This is expected to hit £5.5m in the current year. As long as the global economy remains buoyant there is little to get in the way of continued growth. Hold the shares.
The above recommendations are taken from the daily Investment Column.
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