Investment Column: Now is not the time to reach for SkyePharma

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The Independent Online

The rebels, who include North Atlantic Value, Morley Fund Management and Insight Investment, are insisting on the appointment of Robert Thian, a former Glaxo executive who masterminded a restructuring at the medical equipment maker Whatman, to the role of chairman.

Whether the board caves in to shareholder pressure will become apparent this week. In the best-case scenario, it will approve the appointment of Mr Thian, thereby putting an end to the conflict. However, even with a highly respected pharmaceutical industry player such as Mr Thian at the helm the company is still not an enticing proposition for investors.

Although it has helped develop a number of painkillers and a controlled-release version of the antidepressant Seroxat during the past five years, SkyePharma has consistently failed to make any money from the enterprise which is the only thing that counts in stock-market world. Since 2000, SkyePharma has reported profits warning after profits warning. In 2003 it gave up on its old business model and promoted a new one which aimed to put an end to the profits warning trend by reducing the company's reliance on lumpy licence and milestone payments. So far the new strategy has failed to reap any dividends.

Last year brought more bad news for shareholders as SkyePharma failed to find a development partner for its Flutiform asthma inhaler. When the group put itself up for sale in November it was shunned by industry giants such as GlaxoSmithKline and AstraZeneca, as well as by private equity, and the company received an offer only from the biotech minnow Innovata (which Innovata eventually abandoned).

With this history in mind, investors would do well to avoid SkyePharma shares.

Hornby on right lines for growth

Had the toy maker Hornby not had the foresight to begin moving all its manufacturing operations to China as early as 1997, it is unlikely the company would still be around today. Thanks to this move the maker of model trains and Scalextric is flourishing. Over the past two years it has bought up the number one toy trains brands in Spain, Italy and France, and is now the European market leader.

It is because Hornby's Continental partners failed to transfer their manufacturing to a low-cost country such as China that they had no choice but to sell out to the Kent-based group.

The acquisitions have helped Hornby diversify its toy train operations away from the UK where, according to the company's update yesterday, conditions over the key Christmas period were tough due to the well-publicised high street slowdown.

Further, an expansion into Europe would have been impossible without these acquisitions. As in the UK, local brands are very important to Continental toy train collectors.

Hornby is now in a great position to cash in on its dominant position in Europe. In the coming years, sales will be boosted by a doubling in the number of model trains and accessories being offered by the company. Meanwhile, costs look set to remain low thanks to the company's Chinese production.

Hornby generates solid cash flows, pays good dividends and has the potential to enjoy strong profits growth in the years ahead. At yesterday's closing price of 205.5p, its shares trade on an undemanding forward earnings multiple of 15, making them a buy.

Senior looks a cut above the others

The engineering group Senior yesterday unveiled its first acquisition in six years. It bought Sterling, a private US company which makes transmission components for military helicopters, for £21m including debt. The deal makes sense for Senior as it boosts the group's exposure to buoyant military spending in the US.

It seems to have secured a good price for Sterling. The engineer bought the Connecticut-based company at 8.8 times earnings and forecast the deal to boost its earnings per share by 5 per cent in 2006 and 2007.

The UK group now generates more than half its revenues from across the Atlantic. As well as its aerospace division, Senior's automotive business also looks set to enjoy good growth going forward, particularly thanks to new legislation expected to come into force next year. The US government wants to cut down on diesel emissions from heavy-duty trucks. At present, Senior is the only company in the market which has the technology - a simply piece of kit that is added to a diesel engine - which can enable this.

Combined, aerospace and automotive divisions account for 85 per cent of sales at Senior. Growth at both divisions should drive its shares higher in 2006.

The fact the stock trades at a slight discount to the wider engineering sector only makes it more desirable. Buy.

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