The Investment Column: Matalan still suffering from high street competition

Cash-strapped Pinewood Shepperton is too risky for now; Ark Therapeutics is an investment to avoid
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The Independent Online

Although discount retailers are two-a-penny nowadays, with everyone from Tesco to Marks & Spencer muscling in on the thrills of a cheap Chinese-sourced vest top, when Mr Hargreaves started Matalan the concept was a novelty. He modelled the group on the out-of-town bargain sheds popular in the US.

British shoppers loved the notion of belonging to a shopping club (Matalan used to charge a £1 "joining fee") and the retailer prospered from the virtuous circle that direct sourcing, plenty of new space and cheap togs brings. But unfortunately for the Hargreaves family, Matalan's management couldn't handle so much success so quickly and the company's reputation quickly turned to stardust. An erratic sales line and antiquated computer system didn't help.

A succession of chief executives did little to stabilise the situation, and when John King, the current boss joined in 2002 his was a grim task. His predecessor's investment in systems had yet to pay off and sales were going backwards.

Three years on and the outlook for Matalan is seemingly as tough as ever. The stores still sell clothes at half the price of the high street but that is no longer enough of a draw given the step change in competition.

Yesterday's pre-close update from the group showed that like-for-like sales fell 6.4 per cent in the 26 weeks to 27 August. The past eight weeks were better with a mere 3.4 per cent fall, but brokers still shaved profits forecasts by £2.5m to £80m.

Matalan shares enjoy persistent bid speculation, since its 190 stores would provide either Wal-Mart or Tesco with a handy footprint if they opt for a serious non-food roll-out. Yet Mr Hargreaves, the chairman and 52 per cent shareholder, has consistently said he won't sell out for less than 300p. With profits going backwards, he will have to wait a long time. The shares, up 3.75p to 202.25p, are on a profit/earnings ratio of 16 times making them a hold for existing investors only.

Cash-strapped Pinewood Shepperton is too risky for now

Sir Michael Grade, the chairman of the BBC governors, also chairs Pinewood Shepperton, the historic British film studios business whose fortunes increasingly hinge on being able to attract more TV production work from programme makers such as, er, the BBC.

This happy coincidence (crueller commentators have called it a conflict of interest) will undoubtedly help Pinewood, but it isn't enough to justify investing in this high-risk company.

Barely a year after a flotation aimed at paying down debt, Pinewood has had to agree a new overdraft to avoid breaching banking covenants. It has been sent into the red because fewer blockbuster films than expected are being made at Pinewood. Only two (Basic Instinct II and The Da Vinci Code) are in production now.

Pinewood blames the Government, which is reviewing a tax break on the film industry that has been overused. The uncertainty scared off big producers, apparently, but the truth is this will always be a volatile business - with Pinewood being sharply more or less competitive than overseas rivals depending on the dollar exchange rate.

Pinewood bought Teddington Studios, home to The Office and Pop Idol in recent years, and hopes that its ability to host whole channels (such as shopping channels) will mean less volatile earnings in future. There is also hope for renting new office space to media companies if Pine-wood can afford to develop its main sites. Unfortunately, it is strapped for cash at the moment and the share price (128.5p yesterday) is not supported by the asset value of the company. Sell.

Ark Therapeutics is an investment to avoid

To many in the City, Ark represents the last flotation for Old Biotech, gotten away after a big marketing push by its brokers in March 2004 but never having seen the issue price since. Latterly, only more commercially-minded companies with real revenue streams have been able to command such market valuations.

Ark is heavily loss making, working on a half-dozen expensive development programmes that are likely to have consumed all its £40m cash pile within 18 months. Obviously, making significant product sales is the best way to avoid a cash crunch. But Kerraboot, for leg ulcers, is not it. Sales of this first product have been disappointing, with nurses resisting the switch to an absorbent boot from traditional dressings.

Most of Ark's value lies instead in hopes for Cerepro, a live virus injected into the brain which seems to prolong the life of people who have had a tumour out. It could be on sale in Europe in 2007, but it is new science and risky and Ark is playing a dangerous game encouraging the City to believe in a best-case scenario.

Ark has a long list of milestones it could pass in the coming months, all of which could nudge the shares higher in the short term. But for the long term, sell.