The Investment Column: Raven poised to fly high on Russia's consumer boom

Burren Energy; Phytopharm
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The Independent Online

Our view: Buy

Share price: 108.5p (-0.25p)

The Russian economy is booming. It is growing at 6 per cent per annum at present. More important, the Russian people look to have caught the consumerism bug and it shows no sign of abating. Retail sales in the former Soviet country are forecast to double between now and 2010.

It is from this trend that Raven Russia, which is managed by the property tycoon Anton Bilton, is looking to profit. It has built up a portfolio of commercial property - logistics warehouses to be precise - which will help Russia's capitalists deliver to the people what they want - that is more and better material goods. Yesterday, the AIM-listed group unveiled a deal which will see it develop a 230,000 square metre warehouse costing £85m in the southern city of Rostov-on-Don. Raven has secured a local partner to help with this and it will also act as an anchor tenant for the site.

The economics behind what Raven is doing are very simple. There is a serious lack of warehouses in Russia at present. It is estimated that demand outstrips supply by four to one. As a result, the company predicts a yield on the total cost of the Rostov-on-Don project of 15.5 per cent.

Raven has raised £430m in total from AIM over the past year and a bit and is now well on its way to investing this cash, having done a series of deals in Moscow and St Petersburg. By early next year, it expects to have a portfolio comprising of 156,000 square metres of warehouse space, producing a net rental income of around £10m, representing a yield on its overall investment of about 12.5 per cent. That is more than twice the return one can expect from a similar property portfolio in the UK.

Of course there are risks associated with operating in Russia. The legal system is weak and struggles to deal with business disputes in an objective manner - and if you offend the wrong people the penalties can be high, as the Yukos affair showed. Raven hopes to avoid these pitfalls by forging the right alliances with local businessmen.

The group aims to start paying a dividend this year and is targeting a yield of 9 per cent at its 100p float price. Its shares a good long-term bet.

Burren Energy

Our view: Buy

Share price: 860p (-2p)

The exploration and production (E&P) sector has outperformed the wider FTSE All Share by close to 400 per cent and the oil and gas sector by around 300 per cent in the past five years. But, even after this rise, Dresdner Kleinwort believes there are still pockets of value to be found in the sector.

The high price of crude oil and, more recently, a series of takeovers in the industry are behind its stellar performance. The last of the big events in the E&P arena was the news of a bid approach to Premier Oil a few weeks ago.

Dresdner's favourite play in the sector is Burren Energy. Despite the stock's 540 per cent rise since its float back in December 2003, the broker is convinced that there is plenty more upside for investors. Dresdner views the company as a low risk play thanks to its proven resources and track record of extracting considerable value from its operations.


Our view: Hold

Share price: 46.75p (-5.25p)

Shares in Phytopharm crashed 10 per cent yesterday after the Cambridge-based pharmaceutical firm posted bigger than expected losses due to partner payments being delayed.

The plant extract company's losses widened to £6.2m in the year to 31 August, from £3.3m the year before. Revenues crashed from £7.4m to £1.9m. However, it is worth noting that revenue streams in a drug developer will inevitably be lumpy as they are dependent on milestone payments from partner companies until the products hit the market.

Phytopharm has several products up its sleeve that could make it big one day. It is working with the food giant Unilever to develop a weight-loss product derived from the rare South African Hoodia cactus by 2009. That project remains on track, as does the launch programme for its skin rash treatment for dogs that it is developing with Schering-Plough. It has been launched in the UK and plans are under way to launch it in other European markets.

Annual revenues from the obesity treatment could eventually reach more than £1bn, Phytopharm believes.

The firm is also in talks with several companies to license its drugs for Alzheimer's and motor neurone disease. Led by Richard Dixey, it has attracted heavyweights to its board such as Sandy Morrison, the former chief executive of the Unilever subsidiary Lipton.

Phytopharm had cash on hand of £6m at the end of August, enough to keep it going over the next year. This makes it a high-risk stock, but one worth holding on to given its exciting products.