The Investment Column: Advertising risks make Emap just a hold

Topps Tiles; The Innovation Group
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The Independent Online

Share price: 837.5p (+19.5p)

Tom Moloney, the chief executive of Emap, is determined to "build a brand-led, multi-platform media group". Emap already has various consumer magazines, including the gossip title Closer and men's mag Zoo, along with the UK's second biggest radio business including stations such as Kiss and Magic. There is also a business-to-business unit.

Now Mr Moloney is focused on growing the group's digital operations. Revenues from the internet stand at £100m, according to yesterday's annual results, or 10 per cent of turnover, and the Emap boss wants to double them over the next three years. Given the growth enjoyed by online publishers at present, this makes a lot of sense.

Clearly, translating business-to-business publications like the Middle East Economic Digest (MEED) to an online format and making money from it is going to be easier than doing the same with FHM or Zoo. The people who read MEED do so because they have to - they need to know the latest day rate for cranes in Dubai for their work - and so are willing to pay a monthly subscription fee. However, few will pay a monthly or yearly subscription fee for naked pictures of yet another female celebrity from an online version of FHM. Hence, Emap will have to amend its FHM offering for the internet.

As for the straight financials contained in Emap's full-year figures yesterday, they were on the whole positive. Pre-tax profits rose 9 per cent to £223m and the dividend was raised by 20 per cent.

Mr Moloney also assured the City that the sale of the group's forever underperforming French consumer magazines division is on track to be announced by the end of September. This should fetch around £400m and allow the company to return up to 170p a share to shareholders.

However, before readers rush out to buy into Emap, it is worth noting the risks it faces. First, it is vulnerable to a downturn in UK consumer advertising. Second, there is no guarantee the French unit will be sold at a reasonable price. Remember Daily Mail & General Trust's aborted sale of its Northcliffe regional newspapers earlier this year? At 13 times forward earnings, the stock is not particularly cheap. For now Emap is just a hold.

Topps Tiles

Our view: Hold

Share price: 217.5p (+16.75p)

Topps Tiles shares recovered most of the heavy losses they suffered on Monday after a solid set of interim results yesterday. Pre-tax profits came in slightly ahead of City expectations, although at £20m they were flat on the previous year.

Despite the tough trading conditions - the sluggish housing market is bad news for the UK's biggest retailer of tiles - Topps has enjoyed positive like-for-like sales during the past 11 weeks. Meanwhile, margins across its 258-store estate are firmly on the up after the group decided to buy more of its stock from China. The Asian country is now the world's biggest tile maker, having not produced them just five years ago.

Topps shares trade at 16 times forecast earnings for 2006. They are underpinned by the retailer's strong cashflows and a 5 per cent dividend yield so the downside is limited. Should the green shoots of recovery in the housing market turn into a full-blown upturn, the shares will go higher. Hold.

The Innovation Group

Our view: Buy

Share price: 30.5p (+1.5p)

Technology is changing the face of the insurance industry, according to the management of The Innovation Group (TiG) and they believe their company is perfectly placed to cash in from this trend.

Innovation is focused on offering policy management software to insurance companies. They can either buy or rent the software or outsource their entire claims management process to TiG. In the short term, the group expects to benefit from the growing number of new entrants to the insurance industry as increasingly banks, supermarkets and even car makers are offering insurance services.

Judging by yesterday's interim results, TiG's future looks to be bright. It reported a jump in pre-tax profits to £4.3m from £1.1m a year earlier. The group also reported a 40 per cent rise in outsourcing sales. These are important because they are recurring. Today they account for 60 per cent of total revenues compared with 50 per cent a year ago.

TiG is confident that this positive state of affairs will continue for some time. Long-term, it sees a revolution taking place in the insurance industry with car users paying insurance prices that correspond exactly to the number of miles they drive and the areas of the country in which they leave their vehicle.

Further down the line, it envisages cars communicating directly with insurers when they have been in an accident to tell them the extent of the damage and where to send a replacement car or tow truck if need be.

Clearly, TiG's growth prospects are good. Yet, trading at 12 times 2007 forecast earnings, this is not reflected in the group's valuation. Buy.

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