The Week In Review: Hard to work up an appetite for RHM
Saturday 29 April 2006
Trading at RHM, the owner of the Mr Kipling, Sharwood's, Bisto and Hovis brands, has improved in the second half after a poor start to life as a listed company. There are still few reasons to buy the shares despite Monday's upbeat trading statement.
For income seekers, a prospective 5.7 per cent dividend yield is attractive, but in a tough operating market it's hard to see sufficient growth to tempt anyone looking for more than a decent dividend.
Mr Kipling may bake exceedingly good cakes, but today's health-conscious consumers need a little persuading to buy them. With the bread market shrinking, maintaining top-line growth will be hard work.
However, this is a highly cash-generative business and the dividend is well covered. With other food producers, especially Northern Foods, struggling, there may be industry consolidation opportunities. Hold.
The biotech firm, which made headlines with its weight-loss extract from the African hoodia cactus, got another boost on Monday when it launched its skin rash treatment for dogs in the UK. Of Britain's six million dogs, 900,000 get eczema every year; Phytopharm reckons 10 per cent will be treated, providing a healthy revenue stream. The shares have suffered since November, when the company's Alzheimer's drug failed to show benefits in tests, but given its other prospects, it is a buy.
PETER HAMBRO MINING
Peter Hambro Mining, the Russian gold group, is having a great time on the back of record gold prices. On Monday, the company announced very encouraging exploration results. There are inflationary pressures, but these are outweighed by this positive news. To buy the shares, however (up 15 times over the past couple of years), you'd have to take the view that gold prices will continue to shoot up. For the less optimistic, the shares are a hold.
On a 12-month view, Panmure shares have more than doubled. In recent months, they have been held back by worries that Lazard will soon want to sell its 30 per cent stake. A disposal would certainly dent Panmure's stock price. However, these fears seem misplaced. The sector looks ripe for further consolidation. Hold
Nine months ago, this column urged investors to have a punt on Petra Diamonds. Since then, the shares have risen by more than a third, and are up again this week after a positive update from its Alto Cuilo project in Angola. As with most commodities, the price of diamonds has been driven up by demand from Asia. The shares look like they can go higher, but hold for the moment.
At one point in recent years, it looked as if the Reuters business was in free fall. This week's trading update showed just how far the company has come since its share price hit lows of below £1 in 2003. The existing business is doing well, and new initiatives have added to revenue streams. These should deliver an extra 3 percentage points of growth by 2008. Hold.
Rank's market value must be getting close to the point where private equity firms would be interested in making a bid. Analysts believe a private equity firm could easily afford to pay 275p a share - a valuation in line with that paid by Permira for Gala Bingo. The very real possibility of a bid for Rank makes its shares a buy at current levels.
Wednesday's trading statement from Tribal confirmed its recovery is complete. Not only was management "increasingly confident" about the future, but there were signs of Tribal's renaissance. The stock trades at 13 times forward earnings, while the wider support services sector trades at 18 times. Given the difficulties the company has had in recent years this is probably justified. At 222p, the shares are just a hold.
Game reported an 80 per cent slump in annual profits this week. Margins continued to fall, while like-for-like sales in the 12 weeks of the new financial year rose just 2.2 per cent. A takeover is possible and would be welcomed by long-suffering shareholders, but this scenario is already reflected in the shares. Avoid.
A decade since its duel listing in London and New York, the major problem facing Colt Telecom is the ferociously competitive market. These conditions are unlikely to improve. In fact, they will probably become more challenging. At 72p - the stock trades at a 20 per cent premium to the wider sector - should be sold.
Cambrian Mining, the AIM group, plans to buy the rest of AGD Mining it does not already own. The deal turns Cambrian from being a pure mining group into a company with direct operational control over various projects. Since coming to market in 2002, Cambrian has raised around £35m from investors. This is now worth £178m or 228p per share. Buy.
Character's decision to ditch the digital photography arm of its business looks to have been a shrewd move, allowing it to focus on its core games and toys licensing division. The refocused firm is now cleverly vulnerable to takeover but even without a bid its shares are worth buying.
These recommendations are taken from the daily Investment Column
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