The Investment Column: Emerging markets bring out the strengths of Standard Chartered

Alizyme; SHL Group
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The Independent Online

Poultry may be having a tough time in the Far East but banks, it seems, are in the rudest of health.

Standard Chartered, which derives more than three-quarters of its earnings from Asia, yesterday unveiled bumper profits for 2005 and a stiff hike in its dividend.

At almost $2.7bn (£1.5bn), pre-tax profits jumped 19 per cent last year after the £3.3bn takeover of Korea's SC First Bank started to pay off sooner than expected.

Standard is simply in the right place at the right time. An emerging markets specialist, it's neck deep in Asian countries being heaved along by a thundering Chinese economy and in a Middle East reaping an oil price windfall.

Hong Kong was outstanding, with profits there 20 per cent fatter than in 2004 after costs were nailed down and trading activity took off.

But on closer inspection, Standard's 2005 profits were flattered by the recovery of $287m of bad debts set aside in the wake of the Asian Crisis of 1998.

That was much more than expected, and without it impairments would easily, and worryingly, have topped forecasts and operating profits come in around 2 per cent shy of City targets.

The bank attributed this shortfall to an unusually poor second half of the year for trading on its own account and for its private equity investments. This year will be better, investors were reassured.

Standard's shares have soared by about 60 per cent over the past 12 months, fluffed by perennial bid speculation, and have grown by 20 per cent in 2006 alone. Yesterday, they advanced 56 to a record 1,527p.

This leaves the group trading on 16.2 times expected 2006 earnings, which at first glance looks far too rich when set beside the 11.7 times earnings on which UK banks typically are sitting.

But Standard isn't really a UK bank at all. It operates in the fast growth world of emerging markets and is a great long-term bet on their continued development.


Alizyme shares are in vogue again. Since the start of the year they have gained nearly 50 per cent and yesterday's impressive rise, 19p to 185.5p, followed positive trial data from the biotech's ATL104 treatment for mucositis.

The illness is a response to the chemotherapy and radiotherapy used in the battle against cancer and makes eating difficult and painful. With ATL104 analysts believe that Alizyme is addressing a market potentially worth $500m per year, however, it is important to stress that the drug is at a relatively early stage of its development. Yesterday's trial data merely demonstrated that the treatment is safe, tolerable in humans and has some benefits over a placebo - patients taking it suffered reduced ulceration and were able to take solid food by mouth earlier.

ATL104 is by no means Alizyme's most exciting product. Cetilistat, an anti-obesity formula, is widely talked of as a likely blockbuster for the biotech group. It also has a further two products, making it unique among its quoted peers in boasting four products which are making solid progress towards market.

However, at this stage there is no guarantee that any of these drugs will actually make it. So far the group's management have done a great job taking their portfolio over the various early stage regulatory hurdles, but now they really need to start doing deals with big pharma players. These can shoulder some of the development costs and support the process of getting the treatments onto the market and popular with doctors

Investing in biotechnology companies is not for the faint-hearted. Even Alizyme, which with a market value of £300m is one of the sector's biggest, still has zero revenues and is unsure when it will start to generate earnings. None the less, for those investors intent on exposure to the sector Alizyme should be a core holding.

SHL Group

SHL Group is a world leader in psychometric testing - tests designed to check a person's numerical or verbal reasoning and make an assessment of his or her character. These are increasingly used in the recruitment process of large companies so it is no surprise that SHL unveiled solid results yesterday.

Annual profits rose 36 per cent to £7.6m and the group felt confident enough to raise its dividend for the year to 3.4p a share from 2.75p. Hiring the wrong person for a job can prove very costly for corporations, hence SHL's services are in demand and for now there is little on the horizon to change this. The group, which operates in 40 countries and has tests in more than 30 languages, is affected by the economic cycle but nowhere near to the extent of a traditional recruitment player.

Meanwhile, it is enjoying particularly strong growth in its online offering. Deploying its tests via the web is cheaper for SHL and has boosted its profit margins. Importantly, it has not cannibalised its traditional paper and pencil offering. Since the start of the year SHL stock has risen 18 per cent. It has further to go. Buy.