The Investment Column: Bid chatter and solid cash flows make St Ives a sound investment

Bioquell; Walker Greenbank
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The Independent Online

Our view: Buy

Share price: 250.75p (+1.75p)

Times are tough for the printing group St Ives. Intense competition is taking its toll on profits at the printer of Vogue, GQ, The Economist and the latest Harry Potter book.

Much of the damage is being done by a number of privately owned rivals that are prepared to cut prices drastically to win new business.

Interim results from St Ives yesterday reflected this state of affairs. It unveiled a 24 per cent drop in pre-tax profits to £15.6m. These figures were made worse by the disruption caused to the group's US business by Hurricane Wilma.

Its Florida operations were out of action for several weeks because of the storm and St Ives had to place work with rivals to keep its customers happy. This proved to be expensive.

Nevertheless, despite all these troubles, St Ives still enjoys very impressive cash flows. These make it a very attractive prospect to private-equity players who these days are awash with money to invest. In the first half of its financial year, the group generated £32m of cash flow from its operations. Of that total, £17m was spent on buying new equipment to make the business more efficient and the rest on cutting debt and paying dividends to shareholders.

By the end of the present financial year, cash flows should have risen to more than £60m. Meanwhile, at yesterday's closing price of 250.75p, St Ives is valued at only £257m. Given it has debt of just £20m, the printing group is clearly grossly undervalued by the market.

Although it is an old economy business, the printing arm cannot be outsourced to low-cost parts of the world such as China or Eastern Europe. Hence, a move on the company from a rival is also a possibility. Even without a bid the stock is cheap. Buy.

Bioquell

Our view: Avoid

Share price: 116p (-0.5p)

There seems little doubt that Bioquell has the technology to eradicate hospital superbugs like Clostridium difficile and MRSA. It combats these viruses by wheeling a machine it has developed into wards and pumping them full of hydrogen peroxide.

Given how deadly Clostridium and MRSA are one would expect hospitals to be clamouring over one another to get their hands on Bioquell's technology.

Yet they are not. Yesterday's annual results saw the group drop into the red with a £500,000 loss. It promised to do better this year and talked of rising sales. The problem facing the company is that hospitals are far from convinced that the technology is cost effective.

So far, it has had more success selling it in the US than in the UK where the National Health Service is crippled by financial deficits.

Bioquell also has a wound healing business with a number of treatments in clinical trials. Initial results suggest they work well against leg ulcers but are some way off being launched on the market.

Clearly, Bioquell has travelled a long way since Nick Adams, the chief executive, took over in 1998. In those days, the company seemed to be going nowhere with its shares trading at about20p. On taking the reins he restructured and refinanced Bioquell.

Yesterday, the group's shares closed at 116p, valuing Bioquell at nearly £50m. This is a bit steep given it is expected to make only a profit of £1m this year, rising to £1.5m in 2007.

The stock is best avoided until Bioquell starts getting major orders for its technology.

Walker Greenbank

Our view: Buy

Share price: 24p (+5.75p)

Walker Greenbank broke into the black yesterday for the first time in six years. The designer and maker of wallcoverings and premium textiles registered full-year pre-tax profits of £2.6m compared with a loss of £800,000 in 2005.

The turnaround in the company's fortunes has been triggered by an extensive restructuring Walker started in 2004.

This saw management get out of loss-making low-margin businesses and focus on upmarket brands which enjoy good profit margins.

Yesterday's results also brought good news on the pensions front. Over the past year the group has reduced its deficit from £11.2m to £7.9m.

All Walker divisions are now operating at a profit. Its Harlequin and Sanderson brands are doing particularly well. They achieved revenue growth in excess of 10 per cent.

The group enjoyed a strong final quarter and the buoyant trading continued into its new financial year. Ian Kirkham, the chairman, boasted that his company is gaining market share at a considerable pace and trading ahead of City expectations. There were also hints from him that acquisitions could be on the cards over the coming months.

In the wake of the figures, analysts were forced to sharply upgrade their earnings forecasts while directors are believed to have piled into the market to top up their personal shareholdings.

The broker Teather & Greenwood raised its estimate for the current year earnings by 110 per cent. Walker Greenbank shares finished 5.75p higher at 24p. Even after this rise they trades at just 6.5 times 2008 forecast earnings. That is too cheap.

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