The Investment Column: InterContinental Hotels still has room to show its strength

e2V technologies; Surfcontrol
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The Independent Online

Our view: Buy

Share price: 941p (-13p)

InterContinental Hotels Group has been something of a five-star investment since it was cut loose from the old Bass brewing empire. The company, which also owns the Holiday Inn and Crowne Plaza chains, has been free to pursue its single-minded strategy of selling off assets to focus on management contracts and franchising ever since it woke up from its brief sojourn at the Six Continents conglomerate.

Yesterday saw another seven hotels disappear in all but name, bringing the total raised from 175 property sales to more than £2.8bn since it was demerged from Mitchells & Butler in April 2003.

Morgan Stanley Real Estate Funds became the latest property investor to check into IHG, paying £440m cash for the privilege. IHG will manage the 2,500-plus rooms sold for at least the next three decades. It will also get to convert up to 1,000 rooms owned by Morgan Stanley to one of its brands.

The sale shuts the door on IHG's mammoth disposal programme, leaving it owning five landmark InterContinental properties outright - in Paris, London, New York, Hong Kong and Atlanta - plus 17 other Holiday Inn and Crowne Plaza sites worth around £1bn in all.

The world's biggest hotel owner also manages some 500 properties and has franchised its brands to 3,000 sites around the globe. It has another 100,000 rooms, or 900-plus hotels, on order, in effect spending $10bn of other people's money in return for the right to manage or franchise the hotels once they are built.

IHG has committed to return £2.75bn to its investors although yesterday's deal means the total sum could top £3bn. Its other options are either to invest more or cut debt - not that it has much.

Given the strength of its stock, this column was perhaps too cautious when it recommended just holding on to the shares a year or so ago. Much of the rise has been fuelled by bid speculation - something IHG privately dismisses as a market pipedream. The shares are no last-minute deal but still worth a buy.

e2V technologies

Our view: Buy

Share price: 249.6p (+23p)

Unless they are firemen or fly jet fighters for living, the closest that most investors will come to anything made by e2v technologies will be when they have a tooth pulled.

The company, once part of Lord Weinstock's GEC empire, comprises two divisions: electronic tubes and sensors. The former has been making the tubes used in the televisions and radios of an earlier age for half a century. Now they can be found anywhere that modern semi-conductors struggle to handle power, for example in the masts that broadcast TV pictures across yawing expanses in the US.

This specialism, which blurs high-end engineering and electronics, is a high-margin and relatively stable business, if not a spectacular growth story.

The company's other division produces microchip-based sensors that dentists use in digital x-ray cameras that monitor the road ahead for drivers on cruise control or help firemen "see" heat when tackling a blaze.

This too is a high-margin operation and is seen by e2v as the path to future growth, a view underscored yesterday with the $140m acquisition of its French peer Atmel Grenoble.

For a relatively modest outlay of around 10 times Grenoble's historic earnings, e2v has bought itself access to some of the biggest consumers of sensor technology in the US, including the aircraft giant Boeing and the defence group Northrop Grumman.

City analysts reckon the scale, complimentary skills and earnings enhancement that Grenoble brings leave e2v shares looking increasingly attractive at 249.5p. Trading at little more than 12 times expected 2007 earnings of 18.5p, they are a buy.


Our view: Avoid

Share price: 443p (+5p)

Three years ago, Surfcontrol looked to be riding the crest of wave. The software group, a maker of internet filters, was valued north of £280m as the shares changed hands for more than 1,050p each. Since then, sluggish growth compared with its main competitor Websense in a maturing market for email and web filters has seen Suftcontrol shares ebb to 443p last night.

Patricia Sueltz took the helm a year ago. She overhauled sales, marketing and distribution while leaving the company's products as they were. Surfcontrol's software, rather than being sold directly to customers, was distributed through re-sellers. Growth returned and billings picked up in a cash-generative business.

Fourth-quarter sales, unveiled yesterday, were 5 per cent better than a year ago and towards the top end of analysts' forecasts. More surprising though, was Ms Sueltz's decision to buy BlackSpider, a Reading-based email filtration specialist, for £20m. That looked generous and out of kilter with her previous strategy.

Trading at less than 10 times an expected cash flow of £75m for 2006, Surfcontrol shares do look cheap against the wider software sector. However, brokers such as Numis Securities are right to be cautious about BlackSpider. Surfcontrol remains a risky investment. Avoid.