The Week In Review: War with Bud makes SAB one for the road

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SAB Miller

SAB Miller has enjoyed a period of earnings growth since buying the US business Miller in 2002, but now its chief executive, Graham Mackey, wants a re-rating as a consumer goods stock akin to Reckitt Benckiser, which is growing because it keeps inventing new cleaning products. That is not SABMiller's game.

Mackay has confounded sceptics (including us) who said that Miller could never compete with the mighty Budweiser. He has made startling progress, particularly with Miller Lite - so much so that Bud has started a price war.

SAB Miller professes itself baffled the market leader would sustain a war that is hurting Bud's profits proportionally more. But if Bud can wreck Miller's recovery, it will be worth it in the long run. SABMiller's growth is slowing sharply. Avoid the shares.


Last year, iSoft established itself as a leading hospital software group when it was chosen as a supplier to the NHS's technology upgrade programme. Now it is planning for significant growth abroad. In May, we predicted a significant re-rating for iSoft, when the shares were at 379p. The recent weakness represents a buying opportunity.


The prospects for Robert Wiseman Dairies, milk supplier to Tesco, are turning sour. Caught between the dairy farmers and the mighty supermarkets, the company is ill-equipped to deal with the rising costs of fuel and packaging that are eating into its already thin profit margins - hence a 22 per cent fall in pre-tax profits to £12.1m. Sell.


We advised banking a 70-per-cent-plus gain on Redrow when we last covered the housebuilder in March last year. The remainder of our investment is up a further 23 per cent since then. With house prices flatter, margins are declining, and the next six-month results will show profits below those of last year. But Redrow has one of the strongest land banks in the industry and some of the more innovative approaches to building. Hold.


New Star has finally floated on the Alternative Investment Market, much to the glee of employees and directors. They owned 60 per cent of the company and the shares soared 23 per cent on day one of trading. Lucky them. The rest of us, however, have missed the chance to board. While New Star is undoubtedly the biggest success story in the asset management sector of the past five years, at this heady valuation, its orbit is too close to the sun.


Might the collective noun for stockbrokers be a jitter? Market participants are prone to scares and had Charles Stanley been reporting its results two weeks ago, it might not even have expressed cautious optimism. However, with markets likely to be driven higher still by buoyant corporate profitability and lashings of takeover activity, the future looks good. Hold.


Life at Associated British Foods is both sweet and sour. The sweetness lies in its Primark retail chain, where performance helped AB Foods announce a 12 per cent rise in annual profits. The sour part of the business is ironically its sugar division which is struggling amid a glut of production. But while this might stunt profit growth over the next year, from 2007 onwards, Primark's expansion will bear fruit. Tuck the shares away for now.


Logica is buying Unilog, one of France's best-respected IT consultancies, for £630m. But while the strategic benefits are clear, Logica's balance sheet is already stretched. Moreover, while European business spending on IT has picked up this year - helping Logica to a rebound in profitability - the medium-term trends are not all in its favour. Avoid.


A very big payday for Stephen Lawrence and John LeFebvre, founders of NETeller, the money transfer business that provides an "e-wallet" for online gamblers to use to play poker and other games. The pair cashed in £218m this week as they sold their stake, down from 49.9 per cent to 20.7 per cent. Some investors will take fright at the share sales, but fear not. Remember, NETeller is still adding 3,000 new customers every day and there is no sense of a slowdown in the growth of gambling over the net. Buy.


Cairn has had an extraordinary few years, buying a block of land in north- western India from Shell and then discovering it was sitting on 2.5 billion barrels. News this week of a new potential find was too vague for analysts to be confident of raising their estimates just yet, but it all adds to confidence. This is no stock for widows or orphans, but for those willing to wait for production - or, more likely, a bid - it is worth holding.

RSA is back from the brink at last

Royal & SunAlliance, the UK's largest general insurer, is barely recognisable as the basket case that Andy Haste joined when he took over as chief executive in April 2003.

Heavy losses from floods, asbestos and terrorism had left the business chronically underfunded - while investors were rattled as they realised just how much risk the group was exposed to.

Two and a half years and one rights issue later, Haste has put the business back on a steady path - it has enough capital to continue growing the business, and is no longer exposed to many of the more volatile types of insurance. As it sold its US motor insurance business last week, the company could finally make the boast that it no longer writes new business in any areas in which it does not have confidence.

What's left of its active business is in good shape. In the UK, its More Than personal insurance brand, has improved profitability ahead of its target. Premiums are still falling in the commercial insurance market, but even here it is still managing to turn a profit at what is the most difficult part of the cycle.

Announcing its nine-month results, the group boasted an impressive doubling in its insurance result - a measure that combines underwriting profits with the returns it makes from investing its clients' premiums.

With the potential upside now outweighing the risks, we are moving RSA from a hold to a buy.

The above are recommendations from the daily Investment Column.


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