The Investment Column: Shipbuilder VT offers prospect of double-digit earnings growth

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The Independent Online

It is possible to make decent money out of shipbuilding in the UK. VT Group, still better known as Vosper Thornycroft, moved last year from its creaking old yards in Southampton to state-of-the-art new facilities in Portsmouth, and has been winning new orders and working more productively there ever since.

So VT's shipbuilding division, once something of an embarrassment, has actually generated a £5.4m profit in the last six months, up four-fifths on the same period a year ago. It has been making the bow sections (about one-third of the ship) of the new Type 45 destroyers for the Royal Navy. By the end of the decade, it could be making up to 20 per cent of each of the two giant aircraft carriers demanded by the Ministry of Defence. Planning for that £3.5bn project will begin in earnest next year.

In the interim, VT hopes it might win one or both of the patrol vessel projects put out to tender by the governments of Oman and Trinidad and Tobago. The Royal Navy and the Prime Minister have been involved in the lobbying on VT's behalf, and it is down to the last two or three in both bidding processes. A victory would give a nice little boost to the shares.

The shipbuilding renaissance has coincided with progress in VT's diversification strategy, which has taken it into other support services industries, including the UK education sector, where it manages school building and maintenance projects. There are ample new business opportunities here as the Government ploughs money into school infrastructure projects through the Private Finance Initiative, although in the short term bidding costs will keep profits subdued in this division.

On the defence side, VT has branched out from ship maintenance into other facilities management and flight training work for the military. And it is pushing for similar business in the US, which is only beginning to learn the benefits of outsourcing to the private sector. VT is running the accommodation for 7,500 military personnel rebuilding New Orleans, for example, and hopes this contract might be extended next year and prove a useful way in for winning other business.

VT will always be a relatively high-risk business, buffeted by the procurement needs of governments that are wont to delay, change or scrap their plans, but it has a good delivery record and the long-term nature of its contracts underpins forecasts for double digit earnings growth over the next few years. Buy.

Avoid GW Pharma while there is risk of fundraising

So, sufferers of multiple sclerosis in the UK will have access to GW Pharmaceuticals' new cannabis-based mouth spray, which is claimed to relieve symptoms of the conditions.

The UK medicines regulator has proved sceptical of the claims and told GW to do more statistically robust trials. But the Canadian authorities have allowed the drug on the market, pending results of studies, and GW said yesterday the Home Office will allow the drug to be imported from Canada and doctors will be allowed to prescribe it to patients who insist on it.

The spray is called Sativex, and the City has long predicted it will be prescribed in many, if not most, cases to MS patients for whom it is not formally indicated, so widespread is the view that cannabis can relieve symptoms of spasticity and pain. It remains to be seen how far the publicity Sativex is generating in the MS community will feed through to sales in the UK even before it is formally licensed in 2007 at the earliest. We still have no official data on sales in Canada, where it went on sale in June and where it will have to win market share from smoking cannabis, which is allowed for medicinal use.

The eventual level of sales for Sativex is difficult to predict, although Evolution Securities is currently predicting GW will have revenues of £12.8m in the financial year to September 2006. If that proves too ambitious, there will be serious questions over whether GW has the cash to survive until it moves into profit.

In these circumstances, Geoffrey Guy, founder and chairman, will be turning his attention to fundraising. Bayer, GW's marketing partner in Canada and the UK, has an option to buy up the rights to the product in other European countries, which could bring in one-off fees. Discussions were promised "during the second half of 2005", but it is nearly Christmas. An equity fundraising is a growing possibility. Avoid.

Takeover hopes make Kewill a buy

Kewill Systems' software products can enhance the efficiency of a business, helping plan the cheapest way to deliver product to a customer or get something shipped from a supplier.

Kewill's biggest single set of users are retailers, but acquisitions in recent years have broadened the company and it now has software for warehouse or haulage companies themselves. Most recently it has been focusing on extending its geographical reach, buying a Continental European business and introducing products for international businesses which can help with steering goods through customs. It is a much tidier set of businesses now than when it was last on an acquisition spree back in the dot.com era, when it accumulated a profligate number of offices in the US.

The company is back in the black these days, thanks to the efforts of the chief executive Paul Nichols and his finance director Guy Millward. The pair hope that by making Kewill into a coherent "order-to-delivery" software business, they might tempt a big player such as SAP or Oracle into buying them in due course.

Results for the six months to 30 September were disappointing, since small business customers are disappearing faster than Kewill is winning international clients. The shares, though, are on a market rating, and probably at a discount to the software sector, so with strong profit growth predicted for the second half, they are worth a punt.

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