The Investment Column: International Power has had a share price surge but it is too high to buy

Investors should treat themselves with an investment in iSoft shares; Findel's classroom supply business could do better
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The Independent Online

International Power boasts a portfolio of power plants around the globe that "can generate enough power to light up 220 million lightbulbs at any one time". That is 15.5 megawatts, the company's share of the output from 37 stations in 17 countries, including 11 that it owns outright.

These numbers represent a significant power surge since we wrote on International Power this time last year. Last December, in partnership with Mitsui of Japan, it bought Edison Mission Energy, a US power producer with 13 plants mostly in Asia and Europe.

International Power funded the deal with a deeply discounted rights issue, and the acquisition has been well supported by the City. It reduces the company's exposure to the US electricity market, where prices are depressed, and makes good on International Power's promise - at the time of its demerger from National Power in 2000 - to substantially grow the portfolio. Better still, it was accompanied by a shift in policy: the company has started paying modest dividends. Our advice last May was to steer clear of the stock, but it has done well since the transforming deal. Unlike other UK power companies, International Power does not supply power directly to homes. A good proportion of the output of its plants is sold into the wholesale market at variable prices. In the US, for instance, the reluctance of rivals to shut down or mothball uneconomic old power stations in New England and Texas, where there is overcapacity, has meant International Power's own younger and more efficient plants are running at a loss. Its shares were the worst performers in the FTSE 100 yesterday because those losses (£7m) were worse than expected in the first three months of the year.

But power plants aren't opened or shut overnight, and the City remains confident that US supply and demand will return to balance between 2007-09. It is the anticipation of this fact that has powered International Power shares higher past year.

Investors have probably now missed the opportunity to buy in on the cheap. Those who do have a shareholding should keep it.

Investors should treat themselves with an investment in iSoft shares

Is iSoft's discount to the rest of the software sector unwarranted? The hospital software company's shares are on a lower valuation in part because of concerns last year that its accounting policies are neither prudent nor properly transparent. It will take a while for a new finance director, hired this month, to re-establish the company's credibility, but last year's panic was exacerbated by bad blood over the merger with Torex.

Analysts are keeping a closer eye now on issues such as accrued income and deferred revenue, but were cheered by evidence yesterday of its strong cash generation this year.

The National Health Service has launched a massive programme to upgrade its IT systems and push forward plans to computerise patient records. While iSoft is a member of several regional consortia, it might yet win additional business that is not already factored into City forecasts - as its appointment as a sub-contractor to BT in London suggests. This should bolster forecasts, as should news on international expansion, notably in Germany and Singapore.

Some analysts were disappointed that yesterday's update contained no news of overseas contract wins, but iSoft promised details of progress with its final results in June, and the stock rose 12.5p to 379p.

There are genuine questions over the growth outlook after the NHS upgrades finish in three years, but before then the shares are due a significant upward revaluation. Buy.

Findel's classroom supply business could do better

Now, pay attention at the back of the class. Findel is the largest single supplier of educational products in Europe. Nursery school toys, exercise books, art materials, percussion instruments, sports equipment, Bunsen burners, you name it. The company made operating profits of £15.5m from this business in the year to March, up 9 per cent, but teacher's verdict would no doubt be "could do better".

After a string of acquisitions to bolster the educational supplies business, the company needs to spend the next year integrating them. That ought to improve profitability. As for sales growth, the hope is that extra government funds for school buildings will free up cash for more day-to-day supplies.

Findel has been building the education business as a counterweight to its historic core, a catalogue shopping division selling Christmas cards, gifts and decorations, which looks to be in gentle decline. In addition, the home shopping division has branched out into electricals, furniture and, most recently, clothing, and sales are going very well.

Turnover in home shopping was up 8 per cent in the year to March, with operating profits up 26 per cent to £42.7m, and sales since the year-end have continued at a similar clip. Initiatives such as the greater use of the internet - particularly to allow customers to personalise gifts - are paying off.

Findel has kept recruitment to a minimum as we go into the consumer downturn and, because most customers buy on credit, there is always the risk of rising bad debts, but the company looks in pretty good shape. Up 9 per cent since we said buy last October, the shares have a dividend yield of 4 per cent.

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