The Investment Column: Alliance and Boots look set to kick off a prosperous future

Lupus Capital; Datong
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The Independent Online

Our view: Buy

Share price: 781p (1.5p)

The next few months are a crucial time for Alliance Boots, as investors try to get a clearer picture as to whether its management can make a success of what has been the most significant retail merger since Morrison's bought Safeway two years ago.

The chemist group, Alliance UniChem, and high street retailer, Boots, formally tied the knot on 31 July, more than nine months after the deal was first announced. And while the new entity has the potential to be an unstoppable combination, there are uncertainties on the road ahead.

Yesterday's trading statement highlighted perhaps the biggest of these - the fact that Alliance UniChem's business remains at the mercy of government policy at home and abroad. The group conceded yesterday that in France, where its wholesale division is struggling, there remains the possibility of further government intervention to contain healthcare expenditure. The same risks apply across other European markets, including in the UK, where the Government has said it is about to claw back some of the money it has paid out to pharmacies selling prescription drugs.

In spite of such risks, the group is fairly good shape. It recently won a valuable new contract with Pfizer to distribute its products in the UK. And with the exception of France, the rest of its wholesale business is on track.

On the retail side, the combination is also starting to look compelling. The group is already delivering synergies by selling key Boots products through Alliance's UK chemists, and sales of suncare and hay fever products have been strong.

Analysts believe that if European regulation goes its way, Alliance UniChem has the chance to become Europe's equivalent of US drugstore giant, Walgreen.

Shares in the company have not moved much since the merger, perhaps as investors hold out for a clearer view of the future. Trading at less than 17 times next year's forecast earnings, the company does not look overpriced. Buy.

Lupus Capital

Our view: Buy

Share price: 14.5p (+1p)

The investment company named after a wolf and run by a former star of 1980s capitalism is quietly building a head of steam.

Lupus Capital, is chaired by Greg Hutchings, who built the guns 'n' buns conglomerate, Tomkins, two decades ago,

A nascent mini-Tomkins with a private-equity twist, Lupus revealed yesterday that profits before tax jumped to £3.88m in the six months to the end of June from £870,000 a year ago.

Gall Thomson, which makes specialist valves for the oil industry, delivered a record performance. Schlegel, a maker of seals for doors and windows swallowed for £84m in April, has been fully digested.

Markedly improved sales (£23.68m against £3.14m in 2005), productivity and cost controls are generating healthy cash flows after capital expenditure and working capital requirements. That allowed for a total interim dividend of 0.163p, 23 per cent higher than last year. Lupus now predicts "double digit" earnings-per-share growth over the full year.

The shares, 1p higher at 14.5p yesterday, value the company at £89m. Trading at about 10 times expected earnings this year, against about 15 times for the whales swimming in the same space, they look a bargain.

Lupus has plenty of scope to make its next acquisition and is actively hunting for a deal. Mr Hutchings is in no hurry, however, and stressed he would take his time to land the right target.

Lupus is too small to cross analysts' radar, though this may change by the year end. To invest in it is to back Mr Hutchings. This column does, and so should investors. Buy.


Our view: Buy

Share price: 100p (+5p)

Datong is worth putting under surveillance. The Leeds-based company develops advanced high-performance surveillance equipment used by governments, military organisations and law enforcement agencies to covertly track suspect vehicles, packages, containers and mobile phones. It is well positioned to benefit from increased government spending on counter-terrorism.

In January, Datong issued a profits warning after delays to signing major deals in the UK and US. But patience has proved a virtue as it revealed yesterday the US government order has been fully invoiced during the first half, while the UK deal will be worth more than it expected.

Since 2003, Datong has achieved organic revenue growth of about 25 per cent a year and has been consistently profitable. It is set to record revenue growth of 25 per cent and earnings growth of 15 per cent this year. Yet it has had a rocky time since it listed its shares on AIM. However, it looks set to capitalise on the increasing demand for its products and with a market capitalisation of only £14m, it could easily become a target for a takeover. Buy.