The Week In Review: Tobacco company lights up markets

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The Independent Online

Cigarette companies have always been seen as a safe harbour in stormy times. Their earnings are reliable (because their customers are addicted) and they have been adept in picking up new customers in emerging markets as Western governments have tightened the legal framework in which they operate.

This week's statement from Imperial Tobacco was a case in point. Amid all the turmoil of recent weeks, it was terribly reassuring to hear a company talking about full-year performance in line with expectations. The proposed acquisition of the Franco-Spanish rival Altadis is also on track.

The smoking bans in Britain have hit volumes, but Imperial – whose brands include Lambert & Butler and Richmond – says it has picked up market share while the pricing environment is improving. Conservative investors, who are comfortable with having this stock in their portfolio, can be reassured that Imperial remains a solid, if unexciting, investment. Hold.


Shares in Misys received a welcome boost on Wednesday after the software developer said sales in the first quarter increased by 6 per cent, better than most observers had predicted. Misys, which develops products for the banking and healthcare sectors, has yet to feel any impact of the credit crunch that has caused the banks such woe, and its shares climbed 9 per cent on the back of its results. Misys has plenty yet to do to hit full-year expectations and admits it is too early to gauge any improvement at its healthcare division. But the company has secured several partnership deals recently, and more should follow. Misys trades at a fairly undemanding valuation. Buy.

Brit Insurance

Brit Insurance is reducing the amount of risk placed with reinsurers for large individual projects. It can do this because – as a billion-pound plus company – it is big enough and diverse enough to be able to withstand one-off hits with relative ease. This company is a quality operation and while premium rates at Lloyds are probably past the peak, it also has a decent UK business where rates should go up. Hold.

Burren Energy

Burren Energy blamed falling oil prices on a poorer than expected first half this week. Even so, the company looks in good shape with production still rising 7 per cent to almost 39,000 barrels of oil per day during the period. Burren has operations and exploration rights in the Congo, Yemen, India, Turkmenistan and Egypt. Investing in emerging market energy plays is always risky, but Burren has been able to make the quantum leap from explorer to producer without seeing its valuation get out of control. Trading on just under nine times forecast 2008 earnings, the stock is good value and should benefit in the second half from much stronger oil prices.

Gyrus Group

Gyrus is a rare beast, a UK medical technology group that has managed to deliver on its promises – more than trebling in value over the past five years until the summer sell-off knocked 25 per cent off its value. Gyrus is a pioneer of keyhole surgery technology. Its main business is in urology, gynaecology and ear, nose and throat operations but there is scope for the company to move into more general medical procedures. The company does almost 80 per cent of its business in the US and while the dollar may be having a transnational impact at the moment, the underlying operations look to be in decent shape. With strong potential for growth, this is a buy.


The plumbing and building supplies group Wolseley has lost more than 35 per cent of its value in the past three months and now trades at a three-year low. The US housing market and weak dollar are major concerns as the company generates 65 per cent of profits on the other side of the pond. But are things really that bad? Even with the dollar headwind, the company is still growing, and it remains comfortable with forecasts for the current year and beyond. Should the US housing market recover, there will only be an upside. It could be worth waiting to see the full-year numbers next week. The broker consensus is pre-tax profits of about £767m, with that figure rising to £861m in 2008. With a solid upside to the valuation, and for a company that has a strong track record, it looks a worthwhile bet in the long term. Buy.


The publication of the seventh instalment of JK Rowling's phenomenally successful Harry Potter series marked the end of an era for its publisher, Bloomsbury, who famously signed up the author on the recommendation of chairman Nigel Newton's eight-year-old daughter. But Mr Newton was at pains yesterday to point out that Harry Potter will be working his magic for some time, stating it will be a big book for many years to come, which, of course, means a steady stream of revenue for the publisher. However, it is not all just about Harry. In the first half of the year it had 34 bestsellers. Bloomsbury is also investing in cookery titles. With shares trading at under 16 times forecast earnings, they remain good value. Hold.

FDM Group

Aim-listed FDM is unique in the staffing market – it recruits and trains IT specialists, guaranteeing them two years of work once the training is completed. It then hires them out to customers as high-margin consultants. If we go into a recession, permanent recruitment is likely to suffer, but companies are happier recruiting temporary staff in a slowdown. FDM offers defensive qualities with a strong growth record – during the last major market sell-off, FDM still managed to grow earnings. The stock trades at a substantial discount to the rest of the recruitment sector, and at just nine times forecast 2008 earnings offers good value and a growing dividend into the bargain. Buy.


While HSBC suffered badly from Household, its US sub-prime lender, it does not appear to have quite the problems some of its rivals have been grappling with and efforts are underway to improve things. What is more, thanks to its Asian businesses HSBC is actually top heavy when it comes to deposits. The current credit crunch has been caused by banks' refusing to lend to each other, making it difficult for some (such as Northern Rock) to refinance loans. With its robust capital base, that does not matter to HSBC. It looks like a very safe place for one's money. We have been sellers of HSBC for a while now. Time to start buying.


Investec has its own problems with "sub prime" lending having bought Kensington Mortgages at the worst possible time. This week, it admitted it would have to downgrade its profit expectations for the business. The company, which operates in South Africa, Britain and Australia, said it was in "fairly good shape" in the face of the credit squeeze with diverse operations in diverse territories and a decent amount of cash to boot. It is tempting to sit tight and see the stock as a recovery play – it is hardly expensive. But in the current climate it is hard not to see the shares falling further. Sell.


Mobile content developer Win has been through some twists and turns, most notably at the start of 2006 when the loss of a significant contract with T-Mobile threw the company's finances into disarray. However, under new management, it has improved its performance by focusing on the enterprise market and interactive mobile services. Importantly, Win is already profitable with cash in the bank. Given that it operates in such a turbulent market sector, Win trades at a bargain basement valuation. Buy.

Pub and bar company left nursing a £140m headache

Be careful what you wish for. The pub and bar owner Mitchells & Butlers was so keen to move on a property joint venture with Robert Tchenguiz that it set up all of the hedging requirements before finding out if it could borrow the money required. As a result of the market turmoil, the hedging strategy has failed spectacularly so far, leaving M&B nursing a £140m headache – more than double its losses when the property venture was pulled in August.

To observers' surprise, this week's trading statement included confirmation that it is still looking at starting up the property vehicle. Investors could be forgiven for believing that a pub operator would have enough on its plate with the smoking ban, bad summer and decline in beer sales – but M&B has carried on regardless.

So far, the hedging positions have not been closed out, meaning that the loss recorded is only on paper. Most of the positions taken in the hedging strategy have plenty of time value left in them, even if their intrinsic value has taken a hammering, so there is a chance that by the time M&B comes to close, its losses could be much smaller and could even turn into profits. But in the current market, that's a long shot.

Meanwhile, M&B's business is weathering the storm remarkably well and confirmed that full-year results will be at the top of market forecasts.

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