The Investment Column: Risky Isis offers too bumpy a ride

Lookers in top gear with room for further growth - Coffee Republic faces an uncertain future
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The Independent Online

Investors in Isis Asset Management could be forgiven if their heads are still spinning. The detail of the company's merger with F&C is highly complex, and it is only gradually becoming clear what will emerge from the other end.

Investors in Isis Asset Management could be forgiven if their heads are still spinning. The detail of the company's merger with F&C is highly complex, and it is only gradually becoming clear what will emerge from the other end.

The enlarged group - which plans to hang on to the lesser known F&C brand in spite of the millions ploughed into promoting the Isis name over the past two years - will be the UK's fourth largest UK fund manager and a top 10 player in Europe. It will boast management of funds totalling £120bn, and have annual revenues of £245m and operating profits of more than £80m. To help people understand the combined group, F&C yesterday announced its first-half results, a 31 per cent rise in earnings thanks to cost cuts and increased revenues. All very impressive.

But while scale may be the key to success in the fund management world, it is not worth pursuing at any cost. Although Isis shareholders will hold a stake in a substantially bigger company - with a market value more than three times the pre-merger group - they are paying a high price for F&C. It is difficult to see the deal enhancing earnings per share for two years and any hiccups in the integration could delay that further. Isis has also only just finished assimilating the investment arm of Royal & SunAlliance, which it bought two years ago, and has barely paused for breath before getting involved in another sizeable and disruptive integration. Doubt has been cast over whether the current dividend per share is sustainable.

Isis shares have been suspended at 199p since the deal was announced in July. Although Friends Provident have bought shares in the new company at 260p, it is unclear whether the stock will trade anywhere near those levels when it opens for business again this autumn.

Existing investors should not do anything precipitous, rather take the long view and be prepared for a bumpy ride. For the prospective buyer, however, Isis is one to avoid while the risks are this high.

Lookers in top gear with room for further growth

Forget sheepskin coats and tacky jewellery, flogging motors is big business and it can deliver solid gold returns.

Yesterday, the car dealership group Lookers unveiled another bumper set of first-half figures. Profits more than doubled to a record £26.1m.

Lookers shifted 13 per cent more new cars and 16 per cent more used cars from its forecourts. The country's fourth-biggest dealership also netted a £16.8m rebate for unclaimed VAT dating back to the 1970s. And it lifted its interim dividend by more than a fifth to 4p.

Investors who hitched to the Manchester firm for the long haul cannot complain. Up 6p to 288.5p yesterday, the shares have quadrupled since 2000. They are valued at 9 times likely 2004 earnings, giving a dividend yield of more than 4 per cent. Shares in its bigger rivals are more expensive and offer poorer returns.

Rising interest rates threaten to curb our hungry appetite for new cars, making financing deals less appealing and making us generally feel poorer. But cars are not expensive really, with oversupply likely to keep prices low and demand ticking over.

For safety's sake, though, Lookers spent £31m last month to acquire the parts distributor FPS, taking it further into the higher profit, less seasonal after-sales market.

In autumn 2002, the shares were cruising just below 200p and we advised a hold. Even after their powerful rally, there is still gas in the tank.

Coffee Republic faces an uncertain future

The buzz that investors once got from coffee has long since subsided and left them with a headache. Too many me-too operators rushed to open high-cost, high street copies of the Starbucks format, and most have retired hurt. Madisons Coffee is now a restaurant group; Coffeeheaven has gone to Poland; and yesterday Coffee Republic was explaining how it is moving into deli bars.

Coffee Republic once boasted 105 outlets, most within the M25, but after a string of disposals it has slimmed down to a modestly profitable 50, mostly outside the M25. The London coffee bars are still losing sales.

So what of this deli format? It is very, very early days. Four are open so far, serving scrambled eggs and bacon for breakfast, pasties for lunch, and made-to-order sandwiches all day. Plus great coffee, to distinguish the outfit from your average mom-and-pop caff. Sales have gone up 30 per cent in converted outlets, but it sounds costly to do all this on site, so the extent of future profitability is still shrouded in mystery.

And that is even before we get to the question of whether the company will get the cash to fund a proper roll-out next year. With debts of £2.5m, against a market capitalisation of £3.6m, the company's future is not assured. Cut losses.

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