The Investment Column: Reckitt Benckiser can continue to reward investors

Alphameric; Telephonetics
Click to follow
The Independent Online

Our view: Hold

Share price: 2,595p (+111p)

Reckitt Benckiser has outperformed its peers for seven straight years. Judging by yesterday's annual results from the consumer goods giant, this trend is unlikely to be reversed any time soon. Quite simply, every single metric one can use to measure the performance of a company is going in the right direction.

For the year to 31 December 2006, sales rose 18 per cent to £4.9bn, helping net income soar 19 per cent to £786m. Margins were up, debt down and cashflow jumped a staggering 26 per cent to £953m thanks to new product innovations and the successful integration of Boots Healthcare International (BHI). Given this performance, it is little wonder that Reckitt was able to raise the amount of cash it returned to shareholders (including both dividends and share buy-backs) to £600m from £565m in 2006 and that its shares gained 4 per cent to close at a fresh all-time high.

Looking to the future, investors can expect another strong year in 2007 from the maker of leading brands like Vanish, Finish and Airwick. Management has set a target of 6 per cent revenue growth and low double-digit net profit growth. In February last year, Reckitt acquired BHI, which produces the Nurofen painkiller, for £1.9bn from what is now Alliance Boots. This business has been integrated ahead of schedule and is producing a stronger performance than originally forecast.

Clearly, Reckitt's strong cashflows make it an attractive prospect to private equity. The group's present market capitalisation of £18.5bn is unlikely to put private equity off given the record amount of money firms have to invest these days, but the premium it would have to pay will. That and the lack of scope for cost savings at this very well run corporation mean it is relatively safe from a buyout bid.

Not that this should worry investors. They can expect the business to continue to perform strongly in the years ahead. Reckitt stock has outperformed the FTSE 100 by nearly 20 per cent in the past 12 months and now stands at a chunky premium to its rival Unilever. However, its superior top-line growth and profit margins mean this valuation is thoroughly deserved.


Our view: Worth a punt

Share price: 48.5p (+0.25p)

2006 is a year that Alphameric wants to forget. Pretax profit collapsed to £735,000 from £7.1m after sales slipped 7 per cent to £66m. Even its broker Investec called the full-year result, unveiled yesterday, "disappointing". Rodney Hornstein, its well-regarded chairman, has also decided to leave Alphameric this year after more than a decade with the business.

The software developer sells systems to companies in the hospitality and gaming sectors and counts the likes of Coral, Ladbrokes, William Hill, Costa Coffee and Pret a Manger among its clients. Alphameric is confident that it has surmounted the problems it experienced last year and expects to benefit from cost-cutting during 2006. Mr Hornstein also pointed to a number of "exciting initiatives" that should come to fruition over the next three years that could add significant value to the company. The company's joint venture with Racecourse Media Services, a consortium of 30 UK racecourses, to launch a new betting channel for UK bookmakers is potentially very lucrative but it could be some time before the venture takes off.

Trading at 12.6 times next year's earnings, Alphameric is worth a punt although it is probably not worth betting the ranch on the stock.


Our view: Hold

Share price: 9p (-3p)

Profits warnings come in threes, according to the old City adage. Well, Telephonetics has certainly lived up to the saying. Yesterday the speech recognition group issued its third profits warning in four months, sending its shares to an all-time low.

The latest setback sees the company alert the City to the fact that its results for the year to 30 November 2007 will be significantly weaker than expected. This is because of a slower uptake of its products in the public sector, particularly by the National Health Service. Also, the AIM group's management plans to invest a large amount of cash in a new strategy aimed at boosting revenues. This will see Telephonetics expand its sales team and also focus on selling more of its products to big corporations.

Telephonetics' key product is Movieline - a speech recognition system that allows customers to book cinema tickets over the phone without needing to speak to an operator. Things started to go badly wrong for the group after its acquisition of Voice Integrated Products last summer. The purchase has taken a lot longer to integrate than originally expected and was to blame for the profit warnings that followed in October and December.

But, valued at just £9.7m and boasting a cash pile of £3m, Telephonetics stock is probably worth worth holding in the hope that the business will recover, although investors need to be patient - it is likely to be a long haul.