The Investment Column: Stick with Dimension Data as it bucks the trends of the technology sector

Suppress an appetite for Phytopharm shares until the newsflow improves; Weir set to benefit from natural resources boom
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Dimension Data became the latest technology business to announce bad news about European growth yesterday when it delivered its half-year results.

Dimension Data became the latest technology business to announce bad news about European growth yesterday when it delivered its half-year results.

However, while the technology consultancy's bearishness echoed the likes of IBM, which is culling 13,000 jobs, it was not enough to take the shine off a solid set of results, repaying our faith in the company.

A year ago we tipped Dimension Data as a likely long-term winner at 33p and yesterday the shares finished at 36.5p - admittedly a small rise, but progress is progress, especially in the technology sector.

One of the attractions of the company was its spread, both geographically and operationally, and that diversification has paid dividends over the year.

The company's core business is in network integration, a technical term for corporate hand-holding. It helps business customers get the most out of their technology, often bought from diverse suppliers, and which needs experts to make sense of it all. The networks in question are those telecoms and technology systems that allow a company's staff to talk to each other within buildings, across different sites in different countries. Perhaps most crucially of all, they connect a company to its most important business partners and customers. Yesterday's results show that in many markets companies are now starting to spend more in this area, largely to squeeze every last bit of productivity and efficiency from the technology they splashed out on in the technology boom.

Turnover in the six months to 31 March grew 15.4 per cent to $1.3bn (£700m), a healthy 12.7 per cent on a like-for-like basis. Group operating profit was up from $7.5m to $24.6m, while the company's costs have shrunk as a percentage of revenue to 19 per cent from 20.3 per cent a year ago.

That said, the company has not simply been adopting a slash-and-burn approach. In fact, this year it intends to add 300-400 to staff numbers to carry on making the most of growth potential in its markets.

All of its main areas of business, including the UK, delivered good results with the exception of continental Europe, which the company described as disappointing. However, remedial action in Germany, Sweden and Spain - the main culprits - has already been taken and the company said it expected a substantially improved performance from these countries in the second half.

The shares trade on a price earnings ratio of 27 times for next year which, for a quality company, is justified. Stick with it.

Suppress an appetite for Phytopharm shares until the newsflow improves

It has been a disappointing few months for Phytopharm, the company trying to develop drugs from plants. Just as it was set to raise £24m in a placing, the Japanese pharmaceutical group helping develop its Alzheimer's drug decided not to proceed with the project. The fund raising had to be scaled back to £10m, the share price slumped, and the company is having to cut out some development programmes to save its cash.

The Japanese débâcle is of a piece with previous setbacks. Phytopharm's record is second to none when it comes to signing up blue-chip partners to share the costs of developing its products. Its record in actually getting products to market is still very poor. It would take a brave investor to hold this share for the long term, but there will often be the opportunity to make a turn from trading the stock on the basis of expected newsflow.

There is an argument, however, that even now, with the shares down 40 per cent since we said sell in December 2003, we are not at the point where speculators should get back in.

The company has signed up Unilever to develop appetite-suppressant snack bars from Phytopharm's anti-obesity cactus, but products could still be three years away. Meanwhile, there is the risk of disappointing data from Alzheimer's trials. Wait.

Weir set to benefit from natural resources boom

"Security and government transition issues" meant Weir Group, one of the world's biggest makers of pumps for the oil and mining industries, suffered delays to the orders it has been expecting from Iraq. The Glasgow-based company also told shareholders yesterday that a fire at one of its testing sites also meant it had to put back £5m of sales until later this year.

Despite these setbacks, Weir's management could face the company's 111th annual shareholder meeting with the business in fine fettle. An engineering group such as this will be in a state of almost perpetual restructuring, and Weir is currently shedding 490 jobs and closing two UK factories to shore up profit margins. But cash generation has been a particular plus point over the past year, and Weir is still only early into a £50m share buy-back programme that is supporting the stock price. The company has cash to spare for acquisitions, and has been looking hard in growth markets such as the Middle East and Asia.

Across the group, the level of orders booked in the first quarter of the year has continued at a satisfactory rate, albeit slightly below last year's exceptionally high levels, and the group looks on course to meet the City's profit forecasts.

Weir's customers in the natural resources sectors are investing heavily to take advantage of sky-high commodities prices, and it is enjoying additional commercial opportunities from new customers in China, which is in the throes of an industrial revolution. The shares, with a dividend yield of 4.4 per cent at 300.5p, look worth holding.

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