The Investment Column: Time to look beyond GWR/Capital

ML Labs needs to kick its cash injection habit - Thorntons' chocolate box has too many hard centres
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The Independent Online

Capital Radio and GWR, the soon-to-be-merged radio companies, are already playing the same tune - as far as trading is concerned anyway.

Capital Radio and GWR, the soon-to-be-merged radio companies, are already playing the same tune - as far as trading is concerned anyway.

Both groups, which were supposed to be on an improving revenue trend, wobbled in the final quarter of last year, updates revealed yesterday.

GWR said that October and November were negative, while December showed little growth, meaning that revenues declined 3 per cent for the quarter. That performance was in contrast to the very strong growth that the Christmas quarter had seen in 2003. Its national flagship Classic FM saw a 7 per cent drop this time, compared with 12 per cent growth in 2003.

All this was pretty disappointing. GWR said the radio advertising market continues to be "inconsistent", with January 2005 expected to be down 4 per cent on last year. Capital Radio, the owner of London's 95.8FM, provided slightly less detail yesterday. But its fourth-quarter revenues declined 4 per cent and it predicted that January would turn out to be flat.

The contracting top line seen at both companies at the end of last year gives further credence to the view that the merger of the pair - which has regulatory clearance and should complete in early May - was largely defensive in nature.

The deal got through competition watchdogs largely unscathed but critics of the transaction say this was because the companies have limited overlap - meaning that bringing the two together does not actually strengthen their position in any particular regional or national markets.

Still, the combined group will undoubtedly be the big beast in the sector, which should help it protect the premium rates that its flagship stations can command from advertisers.

The shares of the two companies have already priced in the benefits of the merger, which include cost savings of £7.5m. That means investors really ought to hunt for value elsewhere and here the still-growing Chrysalis provides the most interesting opportunity. GWR/Capital is a hold at best.

ML Labs needs to kick its cash injection habit

ML Laboratories has a habit of running out of money. The company was again one of the UK's worst performing biotech companies last year and it would be unwise to bet it will reverse that position in 2005.

ML is developing or helping to develop a handful of new drugs - treatments to reduce complications after surgery, to deal with kidney problems - and to tackle cancers. It is a ragbag of products. There is also a more coherent business developing a novel inhaler, which it has licensed to a number of pharmaceuticals firms looking for more efficient ways for patients to use their inhaled drugs.

The company raised £14.4m in an emergency rights issue a year ago, but most has already been spent. Its cash cushion at 30 September (the figure released yesterday and already out of date) was £10.9m. The business lost precisely £10.9m in the year to September, and costs have not been cut significantly.

There is talk of profitability in the current year. There was similar talk in 2002, when we last wrote on this stock. Much rests on signing licensing deals and progress in trials of still early-stage and risky products. There is far too little headroom, far too high a chance that the money will - yet again - run out.

Thorntons' chocolate box has too many hard centres

Thorntons is like a box of chocolates: you never know what you're gonna get.

Investors who buy the shares now are buying a historic chocolate manufacturer, owner of 600 shops where expansion opportunities and sales growth are limited, but which has been growing sales instead by supplying its luxury confectionery to supermarkets.

But next month, the company's newish executive chairman, Christopher Burnett, is unveiling a review of that supermarket strategy. He fears it could mean chocolate lovers would no longer need to visit the high street outlets and, worse, that supermarkets will become overmighty clients, demanding supply in preference to Thorntons' own stores, forcing down prices and ultimately taking the luxury sheen off the brand.

Axing supermarket sales altogether robs the group of top-line growth (such sales were the bright spot in an otherwise disappointing Christmas for Thorntons), and restructuring the manufacturing business to shore up profitability if it moves to a halfway house will not be easy. These are perils enough ahead without a share price that is so high (at 146.5p, on 17 times earnings) it is vulnerable to shocks. Avoid.