The Investment Column: Mitchells & Butlers sees profits ahead through smoky times

Liontrust Asset Management; Synergy
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The Independent Online

Our view: Take profits

Share price: 892p (+27.5p)

It is just over a year since the property tycoon Robert Tchenguiz attempted to buy Mitchells & Butlers, the pub and bar operator, for 550p per share. Wisely, shareholders rejected that offer. The stock now stands at a 60 per cent premium to the bid, making it one of the best performers in the mid-caps over the past 12 months and winning the company a place in the FTSE 100.

Last Tuesday's results were solid if not spectacular. The company reported an interim profit of £89m, £2m lower than in the first half of last year, as revenue from its estate of 2,000 pubs rose 12.2 per cent to £995m.

The real buzz about the company is its plans for its real estate assets. Rather than convert into a real estate investment trust, as many investors had hoped and some of its rivals have done, M&B is exploring a 50-50 joint venture with Mr Tchenguiz's investment vehicle, R20. The company will transfer up to 50 per cent of M&B's estate into the joint venture, if it goes ahead, which according to M&B will crystallise a substantial proportion of its portfolio at historically high yields.

The smoking ban also comes into effect in England and Wales on 1 July. So far, the ban has had little impact on revenues from Scottish and Irish pubs, and for groups offering higher- quality food, such as M&B, confidence ahead of the ban seems to be bordering on the unseemly. The ban puts a premium on outside space, allowing drinkers to pop out for a quick fag, and with 70 per cent of its estate in residential locations M&B is not short of gardens.

However, while there can be no doubt that M&B is a well-managed business with a valuable property estate, investors have to consider how much of the good news is already in the price. The shares trade on more than 25 times consensus 2008 earnings and given that the Reit euphoria seems to have died down in the property blue-chips long-term holders must question how much extra upside can be generated in the short term. As the market saying goes, leave something in it for the other bloke and bank some profits.

Liontrust Asset Management

Our view: Buy

Share price: 391.75p (+7.25p)

Back in January, this column reviewed the long-term strategy that the boutique investment management firm is pursuing and advised buying the shares. Since then, the price has improved by only 3 per cent or so on the 379p at which we tipped the stock.

Though its UK funds boast a formidable investment track record, the company's performance in European equities has been less impressive. It has also had some difficulties retaining customers - last year, institutional investors withdrew just over £120m of assets from the company.

However, yesterday's preliminary results made more encouraging reading for Liontrust. The company's new European investment team has begun winning mandates and Liontrust boosted profits by 12 per cent to £11.8m last year. The fund manager is also increasing its dividend by 7 per cent to 9.8p a share, and its performance fee income rose from £35,000 in 2005 to £2.9m some 12 months later.

Independent financial advisers and specialist investment intermediaries rate Liontrust highly. In time, that should translate into increases in assets under management without requiring Liontrust to spend big on marketing.

The company trades on a multiple of 17 times' prospective earnings, which is undemanding compared to other valuations in the fund management sector. Rising stock markets should lift all boats in this business, but there's every reason to think Liontrust is on the verge of breaking into a roar. Keep buying.


Our view: Buy

Share price: 786.5p (+10p)

China is booming and the whole world is trying to get a slice of the action. Synergy Healthcare has become the latest UK company to look eastwards for growth opportunities. The specialist healthcare provider, the biggest supplier of hospital laundry services in the UK and Holland, is keen to tap into China's rapidly expanding healthcare market, which is currently worth just £1.8bn annually.

Synergy has signed a deal to build a £10m medical device sterilisation facility in Suzhou, in the southern province of Jiangsu, and is in advanced talks about plans to invest £5m to develop hospital sterilisation services in Beijing. Synergy says it has already secured contract commitments from a number of global device manufacturers.

Back in the UK, the company is a leading contractor to the NHS for cleaning and sterilising equipment.

With MRSA and the issue of infection control rarely out of the news and health authorities increasingly turning to outsourcing as a cheaper way to get the job done, the potential for Synergy's products is huge.

Following its £180m takeover of the sterilisation specialist Isotron, Synergy is bigger and stronger, with a much larger international base. Given yesterday's deal, the company's global expansion plans are well underway. Buy.