The Investment Column: Barclays investors should keep faith after ABN defeat

Prostraken; Plus Markets Group
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The Independent Online

Our view: Hold

Current price: 580p

In normal times, Barclays' shares would have bounced in the last few weeks after it lost out to Royal Bank of Scotland in the battle to buy ABN Amro. Instead, the bank's stock has fallen 12 per cent since 5 October, the day before it conceded defeat.

Barclays is not the only bank whose shares have suffered in the credit crunch. But Barclays is of particular concern because the success of its Barclays Capital investment bank has been closely identified with the booming credit markets that seized up in August.

The investment bank Credit Suisse restarted coverage of the stock yesterday with an 8 per cent downgrade to 2007 earnings, based on higher funding costs and expected reductions in trading and investment income.

Bob Diamond, who runs BarCap, has done the rounds to remind investors that his business does commodities and foreign exchange as well as leveraged finance and structured credit. In his most recent statement, Mr Diamond said he expected higher profits at BarCap next year than this year.

But investors remain wary. Barclays has notconfessed all in the waythat others such as UBS and Lehman Brothers have,and the UK banks' different accounting practices mean Barclays could hold dubious assets on itsbalance sheet instead of marking down their value.

Many expected acquisition speculation to help drive the share price if Barclays lost on ABN. Bank of America has had its eye on Barclays for years, but Ken Lewis, BoA's boss, said last week he had could not stand any more "fun" in investment banking, and it is now more likely that Barclays will attempt another acquisition once it has licked its wounds.

Investors would do well to wait for some more detail from the company before buying Barclays' shares, but with the stock at a near two-year low there could be upside for existing shareholders, and the 4.8 per cent dividend yield looks safe. Hold.

Prostraken

Our view: Buy

Current price: 68p

Prostraken is typical of a biotech company – a bag of potentially exciting products but lacking the muscle to bring them to the market. However, that should change thanks to yesterday's breakthrough deal signed with the US pharmaceutical group NovaQuest.

Under the terms of the deal the two companies will work together to recruit a 75-strong salesforce and Prostraken will make an upfront payment of $10m, which will be spent on marketing costs. NovaQuest will pay for all salesforce costs. The deal is good for three years, after which Prostraken can absorb the salesforce back into the company.

In return, NovaQuest will receive an undisclosed royalty on sales, which analysts believe will be between 10 and 15 per cent, on top of being granted warrants to 2.6 million Prostraken shares at a strike price of 75.5p.

The deal is an excellent endorsement of Prostraken's major product – Sancuso, a drug which prevents nausea and vomiting in chemotherapy patients, and assuming FDA approval is given the drug has substantial market potential. Prostraken has other drugs in late-stage trials, and with three already in the market it is expected to generate sales of over £40m in the current year.

Picking a biotechnology stock is not for inexperienced investors, but Prostraken ticks all the right boxes at this stage in its development. It has a strong balance sheet, drugs in the market, and although it is not yet making profit the upside potential is clear. The deal with NovaQuest brings it low-risk, low-cost exposure to the US market, and for higher-risk investors this looks like one to tuck away.

Plus Markets Group

Our view: Hold

Current price: 24p

The collapse of potential bid talks last week didn't exactly send Plus Markets shares tumbling, but given that the talks were only a fortnight old it is not surprising that some investors will be left wondering what its suitors saw that they didn't like, and many may head to the exit.

But to do so now could be folly regardless of what its suitor, Turquoise (a consortium of major investment banks) saw. The company, an alternative stock market that was born out of the old Ofex trading system, is about to embark on a major expansion programme which could turn it into a genuine competitor for AIM, currently London's junior market.

November will see Plus launch its new trading platform in conjunction with OMX, the Swedish exchange group. The platform will allow Plus to increase the number of stocks it trades from just over 1,200 to the best part of 7,500, and at more competitive rates than the London Stock Exchange (which runs AIM) charges.

The company raised £25m of new cash in December 2006, and most of it remains on the balance sheet. Although there is little in the way of hard numbers to go on, to sell now, so close to such a huge expansion, seems illogical. Investors should be concerned about the failed bid talks, but Plus is in a strong position on its own and is worth hanging on to.

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