The Investment Column: Sad newspaper story at Johnston

CeNeS looks to drugs success to cure ills - Intermediate Capital could still be a banker
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They say that today's newspaper is tomorrow's chip paper. Recent record financial results from Johnston Press - publisher of 241 local titles - were old news even before they were released. No round of applause for the 5 per cent rise in turnover, the 18 per cent rise in profit, the 20 per cent dividend hike. Instead, the shares tumbled and have kept on sliding as institutional investors and hedge funds have gone cold on the story. Private investors should use brief spikes like yesterday's as an opportunity to get out.

They say that today's newspaper is tomorrow's chip paper. Recent record financial results from Johnston Press - publisher of 241 local titles - were old news even before they were released. No round of applause for the 5 per cent rise in turnover, the 18 per cent rise in profit, the 20 per cent dividend hike. Instead, the shares tumbled and have kept on sliding as institutional investors and hedge funds have gone cold on the story. Private investors should use brief spikes like yesterday's as an opportunity to get out.

The problem is that 2004 looks to be about as good as it gets for Johnston, when it was generating strong revenues from both classified and product advertising in its papers and on its network of 182 local websites. The outlook is a far from rosy for its main sources of income.

Johnston's "life is local" philosophy is a coherent one, and the company has done well to embrace new media and to shore up the circulations of its papers with innovative supplements. But the fact remains that fewer people are picking up their daily local rag, and even the growth in weeklies is topping out, it seems. The printing of newspapers on behalf of third parties (including Rupert Murdoch's News International) and its launch of local lifestyle magazines will help bolster Johnston's financial performance, but not by much while the core business remains unexciting.

And it is pretty unexciting. The first couple of months of the new year have shown only 2.6 per cent growth in advertising revenue. This is less than half the growth rate of last year and there is no sign it can pick back up. Property advertising was given a temporary boost by housebuilders desperate to shift their wares in the second half of 2004, and this will fade as the housing market cools. Car dealer adverts, too, have been fewer and further between.

We have been holders of Johnston shares for the past couple of years. They have done well. But at 536.5p yesterday, yielding a measly 1.5 per cent dividend, they look too expensive on 14 times earnings.

Sell.

CeNeS looks to drugs success to cure ills

CeNes Pharmaceuticals has one of the thinner pipelines of potential products in the UK biotech sector: just two drugs in human trials. To believe you can make money from CeNeS shares, you have to believe it can beat this cash-guzzling industry's law of averages to end up with at least one successful product. The company believes M6G will be that product, and within two years.

M6G is a new version of morphine which, earlier trials have suggested, makes people less nauseous than the real thing. Data released last September did not prove that one way or the other, and the next study will need to show a significant improvement against morphine if M6G is to become a commercially viable drug.

The second drug, a treatment for chronic pain caused by nerve degeneration, has trial results in a few weeks. Beyond that, some experimental work in Parkinson's disease looks promising, but it is yet to be tested on humans.

The management husbanded its meagre resources and raised £10.5m last year to fund make-or-break trials of M6G. The science will speak for itself in the end. Investors must not put more on CeNeS shares than they can afford to lose.

Intermediate Capital could still be a banker

It has been a busy year for Intermediate Capital, the finance house. It provided £85m for the £1.75bn buy-out of the AA from Centrica, and a similar amount to back the acquisition of Saga. Meanwhile, it cashed in its stakes in Pinewood Studios and Halfords, which both floated in 2004. In all, Intermediate made a record £778m of new investment, up 19 per cent on 2003, and booked a record £62.9m capital gain from disposals and flotations, up 140 per cent.

Intermediate specialises in mezzanine finance, a mixture of debt and equity for buy-out vehicles. It earns high interest on the debt part, and gets a handy option on an equity stake which it can cash in when the business is sold on. In addition, the company charges a fee for running its increasing portfolio of mezzanine finance funds, which it invests on behalf of other institutions.

Intermediate's "core profit" (which does not include capital gains) rose 21 per cent in 2004, much better than expected. We advised long-term holders to take out some of their profits on the shares last autumn but, while they have been volatile, they are now higher.

With the private equity industry still being the major engine of merger and acquisition activity, and with institional investors putting cash into private equity to diversify away from the public stock markets, there will be plenty more buy-outs, many in need of topping up with mezzanine funds. Intermediate warns that competition is tough, but with global interest rates gently rising, mezzanine finance should become more attractive relative to bank debt. The company's shares have a dividend yield of 4 per cent and are worth holding.

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