The Investment Colum: Punch still a solid investment after FTSE 100 entry

CSR; Persimmon
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The Independent Online

Our view: Hold

Share price: 1,258p (-19p)

Punch Taverns, Britain's biggest pubs landlord, has had a busy week.

First up was the announcement it has won its place in the FTSE 100 Index in the blue chip reshuffle after cigarette company Gallaher was gobbled up by Japan Tobacco. Then there was the news that Punch has moved into the drinks distribution business after buying a 50 per cent stake in Matthew Clark, the wholesale arm of Constellation Brands.

To cap off its hectic week, Punch agreed to sell 869 of its bottom end pubs to privately-owned Admiral Taverns for £326m, cash it will use to pay off debt. Although shares dipped to 1258p yesterday, valuing the company at £3.3bn, the deal was welcomed in the City.

Analysts pointed out the disposal price, representing an average of £375,000 per pub, equated to a 17 per cent premium to the average disposal price Punch has achieved on leased pubs over the past 18 months.

The deal was designed to allow Punch to accelerate the "churn" of the bottom of its estate, which now stands at just over 8,400 pubs. The average earnings for the pubs sold off was around £34,500 last year, compared to the £54,800 the company's other pubs average. Some were drink-led joints that would be more vulnerable to the impact of the smoking ban which will come into force in England in July.

All pub groups are expecting a dip in sales such as that experienced in Scotland, where the ban was enforced last year. But many are also counting on growing revenues from food and from customers that may have previously avoided smoke-filled venues, and Punch has done much to get rid of its weaker pubs.

With interim figures due out on 1 May most analysts recommend taking advantage of the company's lowly valuation compared to its peer Enterprise Inns. However, until the impact of the smoking ban is clear, investors should exercise some caution before buying the stock.


Our view: Buy

Share price: 697p (-2.5p)

CSR has paid £7.5m to settle a patent dispute with Washington Research Foundation, despite maintaining that the suit was "without merit".

The bluetooth semiconductor technology specialist argued that an early resolution to the dispute was preferable to further disruption and legal costs associated with protracted litigation. As the complaint had been filed against CSR's customers, some analysts were concerned that the case could drive some of the Cambridge-based company's clients into the arms of rival Broadcom.

The speedy settlement suggests that the case was unsettling some customers, but the decision to draw a line under the issue will enable CSR to focus on restoring its growth prospects.

After a series of profit warnings in 2006, CSR has reassured investors that 2007 will be a good year. The company hopes to maintain its dominance in the bluetooth design market whilst also growing revenue from products such as new games consoles that use bluetooth, and portable music players that can connect to bluetooth-enabled headphones.

Another growth area is location-based services that use GPS technology.

Concerns over CSR's long-term prospects have continued to weigh on shares and the company has much work to do to convince the market that it is not a one-trick pony.

Yet in the short term the stock looks good value as it trades at a significant discount to the sector. This leaves plenty of room for upside over the coming year.


Our view: Buy

Share price: 1404p (-26p)

Persimmon's trading statement contained few surprises as the housebuilder told investors at AGM that the market was stable.

With £1.8bn of revenue already in the bag, analysts said the company has already achieved over half of their forecasts for the year. The UK's largest housebuilder said it would focus on opening new developments to push the number of homes sold over the course of the year toward 18,000, building on a 32 per cent gain last year to 16,701.

Many observers had hoped that the company would comment on whether it is preparing to join in on sector consolidation. Barratt Developments has lodged a £2.2bn to buy rival Wilson Bowden, while Taylor Woodrow and George Wimpey have unveiled a merger plan. Persimmon has said it has the firepower to pursue any opportunities but has yet to show its hand.

Despite fears that rising interest rates could lead to a slowdown in house sales, analysts remained confident Persimmon would continue to perform.

The company has proven to be a strong operator in slower markets, according to Numis Securities, while Bridgewell Securities said that its valuation fails to reflect the strength of its land holdings and returns.

With the stock trading at less than ten times this year's anticipated profits, the shares look good value even without acquisitions.