The Investment Column: Avoid Rentokil as turnaround will take time to have effect

Post-Adderall future looks bright for Shire Pharma; Canny Carphone stays in the loop

All of which leaves Mr Flynn no closer to sorting out Rentokil's myriad problems. The shares jumped almost 5 per cent on yesterday's quarterly trading update, but it is pretty hard to be cheered by the news of "decelerating deterioration". There have been delays to the turnaround plan, and there is no certainty over what quality of business may emerge when it is finally implemented.

So what has gone wrong with the rat-catching, hand towel-dispensing, tropical plant-supplying company and its once proud record of 20 per cent-plus annual growth? Underinvestment is Mr Flynn's diagnosis, and he had better be right, because his turnaround mainly involves the injection of £35m of annual costs into the business, mainly in new staff, and he warned investors to expect miserly dividend growth from next year.

There were some investors who hoped a review of the group's balance sheet would show scope to return some cash to shareholders, but this was ruled out yesterday. Instead, the company revealed the pension deficit is £50m higher than first thought, at £324m, and will require a substantial injection of cash this year and additional top-ups over the medium term. The group's credit rating was cut yesterday.

Other disappointments included delays to the restructuring of the biggest division, the hygiene business, which requires the sale of a uniform laundering business (where bidders are proving few and far between), and where sales and profits are sliding fast.

At 14 times this year's earnings, and with next year's figures looking highly uncertain, Rentokil shares look high risk. Investors would be wrong to interpret yesterday's trading update as the first shoots of a recovery. Mr Flynn has never promised easy solutions - there are none - and there will be a lag between investing to improve local service levels and actually winning back its lost reputation and customers. Sell.

Post-Adderall future looks bright for Shire Pharma

Shire Pharmaceuticals, one of The Independent's tips of 2005, is up 28 per cent since the start of the year, having turned itself, in the City's eyes, from a one-trick pony to a veritable stable of exciting new drug products.

The company gets nearly 50 per cent of its profits from one drug, a treatment for hyperactive American kids, called Adderall. A US court case early next year is expected to rule that copycat rivals can launch their own products, a development that will probably wipe out three-quarters of Adderall's sales overnight. Unsurprisingly, the City's focus has been on how Shire will manage this problem.

First, Shire has dug out patents on the way Adderall is made that it says bolster its legal case. Second, it asked the US medicines regulator to delay approval for its rivals. Analysts don't dare put it in their forecasts yet, but some investors are betting Adderall will avoid competition in 2006.

These tactics are vital, since the drug had sales of $166m (£94m) in the quarter reported yesterday, but it is the post-Adderall future that has really set the shares alight. The $1.6bn acquisition of TKT, a US biotech firm, was initially derided but investors have been won round, excited by the high prices that can be charged for TKT's specialist drugs for genetic disorders. Another acquired product, a "son of Adderall" called NRP104, is set for launch late next year, one of six product launches in 2006.

Investors must keep an eye on early sales of these drugs since, outside hyperactivity, Shire's marketing machine has not yet proved its ability to handle big launches. But for the next year, Shire should stay a bookies' favourite. Buy.

Canny Carphone stays in the loop

Mobile phone makers are adding so many snazzy functions that it seems the latest handsets can do everything bar operating the DVD recorder at home. They are objects of desire for the European consumer. And consumers are objects of desire for European mobile phone operators, who are battling to steal subscribers from each other with ever more competitive deals.

Which is why Carphone Warehouse shares shot up 11.5p to 210p yesterday, their best level since 2001. It organised mobile phone contracts for 1.55 million people in the six months to 1 October, a one-fifth increase on last year, and is expected to keep growing at this rate as it opens new stores across the UK and continental Europe, and as the mobile industry keeps up the launches of tantalising new phones.

The expansion of the store network (it has 1,600, and will have opened 250 in just this financial year) is also key to the growth of Carphone's other business, its own telecoms services. These are mainly sold through the TalkTalk brand, probably the one alternative to BT to have really captured the imagination. It has succeeded where others such as One.Tel have failed, because Carphone can give the TalkTalk hard-sell to customers in its shops.

The group has its own fixed-line telecoms network (Opal) so it is not reliant on BT's network, and from next year it will invest £15m per annum to install its own equipment in 1,000 BT exchanges (so-called local loop unbundling). This means it will be able to offer even cheaper deals, particularly on TalkTalk broadband services for homes and businesses.

At 20 times this year's earnings, investors in Carphone shares are paying a full price, but it is worth it for the long-term prospects.

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