The Investment Column: Good life goes on for Savills as its pot of gold keeps growing

Inter Link Foods; ReNeuron
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The Independent Online

Our view: Hold

Share price: 656p (-1.5p)

Can things get any sweeter for Savills? Around 3,000 staff at the upmarket estate agents are set to share a bonus pot of around £90m after a surge in home and commercial property prices in the South-east of England in 2006. The pot this time last year was worth £80m, and the year before £70m.

Yesterday, Savills also told investors that its annual results will come in ahead of expectations. Analysts now expect it to post a pre-tax profit of around £70m, up from £57m last time around.

Big City bonuses have played a key part in the performance by the estate agent. After sports cars, flats in plush parts of London such as Chelsea, Kensington and Notting Hill are a favourite destination for bonuses earned by investment bankers. Savills sold a number of properties priced between £5m and £10m last year, deals on which it would have earned astronomical commissions.

And things are tipped to get better for the group in the months ahead. Most City bankers are due to receive their bonus cheques this month, meaning that a fresh spike in London house prices can only be around the corner.

Savills also deals in commercial property, a sector which has been strong both in the UK and Europe amid heavy demand from Middle East investors. The recent introduction of tax-efficient Reits should continue to drive this market in 2007.

Although Savills shares have risen tenfold in the past four years, now is no time to be baling out.

Inter Link Foods

Our view: Buy

Share price: 374p (-27p)

Inter Link Foods yesterday disappointed the City with its interim results. The cake and pastry maker, which supplies the likes of Tesco and J Sainsbury, reported a pre-tax loss of £1.6m for the six months to 4 November, compared with a profit of £2.5m for the same period last year. Sales dropped 7 per cent to £62m.

Why the poor performance? First, Inter Link was hit by an unseasonably hot July - people tend not to buy cakes and pastries when the weather is very hot. Second, a move to a central distribution centre resulted in some orders not being fulfilled in their entirety. Finally, sales at the group usually start rising steadily from September in the run-up to Christmas. This year they were compressed into November and December, and this will not be reflected in the company's earnings until its full-year results statement. Therefore, things are not as bad as they might seem at the cake maker.

Nevertheless, analysts have cut back their earnings forecasts. Although the company remains focused on achieving £140m in sales by the year end, it will struggle to hit this target. In order to do so, it needs to deliver growth of 20 per cent for the remaining four months of the year, which will be difficult given that the wider market is growing at just 4 to 5 per cent. For the full year, analysts are now expecting pre-tax profits of £7.6m, down from £8.5m previously.

That leaves Inter Link trading at just nine times forward earnings, which is far too low a rating.

The company is a strong cash generator, and this should improve in the future as it recently passed the high point of a major investment programme.

Last year, Inter Link received takeover approaches from the likes of 3i and Hg Capital. With the stock so lowly valued by the stock market, readers should not be surprised if a private equity player comes knocking on the group's door once again.


Our view: Hold

Share price: 37.75p (-6.75p)

ReNeuron is a pioneer in the area of stem cell research. It filed for approval with the US Food and Drug Administration to begin clinical trials for its ground-breaking stroke therapy ReN001 in December. The news sent its shares up sharply, as it represented the world's first filing for a neural stem cell treatment for a major neurological disease. However, investors took fright yesterday when the FDA said it had placed the study on hold. Shares dropped 15 per cent - a fall of 6.75p to 37.75p - to give the company a market capitalisation of around £44.7m.

The FDA's decision did not come as a surprise to the company. An application by a US rival was also recently put on hold, but the issues raised were eventually clarified and the hold was removed, allowing the clinical trial to begin.

Analysts point out that the fact that the FDA has asked for a conference call with ReNeuron for clarification rather than sending a written response is a positive, and they are expecting the hold to be removed once the questions have been answered in the call later this week.

ReNeuron's recent interim figures showed a net loss of £3.2m. However, that is to be expected from a biotechnology player. The company, which is also developing stem cell therapies for Parkinson's disease, diabetes and diseases of the retina, is without doubt a high-risk bet, but is one worth sticking with.