Investment Column: European ad market weighs on ailing Aegis

Dividend's in the bag at British Polythene
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The Independent Online

Aegis has long been "the UK's only quoted independent media buying agency". It buys its clients space for their advertising campaigns on television, billboards and the internet and in newspapers and magazines. This is one activity among many in the giant global ad agencies such as WPP, which also come up with the advertising concepts and other advice. And most of these would dearly love to buy Aegis, such is its size and its scarcity value. A goodly portion of Aegis's investors have always owned the stock in the hope of it, one day, getting taken over.

And over the autumn, it looked like it might finally happen. Publicis, the French outfit, made a 140p-a-share bid that tempted WPP and a partner to have a look at the company too. A bidding war, however, failed to break out. Aegis is not worth any more than 140p a share, both suitors decided - a similar conclusion, it should be noted, as was reached by Omnicom one year earlier.

So why should any individual investor pay the current 121.5p when the upside seems to be capped at 15 per cent?

The competing titans of the advertising world may be missing the long-term value of Aegis's business, of course, although this seems unlikely. The company's trading update yesterday was decidedly mixed. Some of the resulting downgrades to forecasts for the financial year can be put down to the £1.6m bill from lawyers and financiers working to defend Aegis from its various suitors. The spike in the share price in September has also increased the cost of the internal share-based incentive schemes. But the downgrades to forecasts for next year mainly reflect a loss of market share by Aegis in the core media-buying business. This comes despite its much trumpeted expertise in online advertising, and is down in part to its greater focus on the sluggish European advertising market.

Synovate is trading well, we saw again yesterday. This is the market research division, which is expanding fast in the Americas and in Eastern Europe in particular. This might one day push Aegis above the titans' current perceptions of value, but with the shares trading on almost 20 times earnings, a big premium to faster-growing WPP, it looks mis-priced at the moment. Avoid.

Dividend's in the bag at British Polythene

If you got as far as learning that British Polythene Industries is Europe's largest manufacturer of plastic sacks and polythene film, and then decided it was too boring for your share portfolio, then you probably shouldn't look across at the share price graph.

As if a doubling of the share price since the stock market nadir in 2003 was not exciting enough, the company yesterday put out a "reverse profits warning" which sent the shares up a further 63p to 512p.

The company's film is used to protect young and tender crops or to pack food for retailers and demand remains pretty constant in these areas. The big variable is sales to industrial customers, but demand for packaging here has been strong in recent years. And thank heaven that it has been, since BPI is having to deal with high and volatile prices of raw materials. Polymer prices have been driven upwards by the oil price and the shortage of ethylene and polyethylene production capacity and, of course, BPI also has to pay higher prices for energy used in its factories.

So the good news yesterday was that BPI has been able to pass more of these costs on to its customers through higher prices than the market had been expecting. It is also reaping the benefits of an internal restructuring that closed two small factories in Ipswich and Redditch. And polymer prices did fall more than 10 per cent in the last couple of months of the year.

Investec, the company's house broker, is now forecasting £17m pre-tax profits for 2005, against its original prediction of £14.5m and up from £11m last year.

The upgrades to forecasts have pushed the share price to below 10 times earnings. A recent European competition ruling on the industrial plastic bags market removed the risk of a fine on BPI. What's more, the dividend yield is still over 4 per cent. Hold.

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