The Investment Column: Time to make getaway at Group 4

Greggs the baker is still hot stuff; Superbug not enough to buoy NeuTec
Click to follow

Group 4 Securicor is one of the world's largest transporters of money, from cash machines and commercial premises, often under armed guard. But it does not make much money for itself.

The profit margin is wafer thin on all of its services, from cash handling, from "security systems" such as transporting prisoners and running prisons, and especially from its main business of manned guarding of premises. Even the profits from the electronic tagging of prisoners, one of the new hi-tech businesses from which investors had expected margin growth, have been negotiated right down by the Government.

Formed last year from the merger of Securicor with Denmark's Group 4, it is a rare disappointment, a company which will achieve lower cost savings than promised at the time of the deal. Originally £35m, the synergies were revised down to £30m after competition authorities forced the disposal ­ at a loss ­ of the Netherlands operations. Although that £30m will be achieved ahead of time, the target will not be exceeded because of trading difficulties in Germany and South Africa.

The challenges in these two countries were the main upset in yesterday's complicated financial results, disfigured by the merger, by disposals and by currency fluctuations. It would be going too far to describe the reaction as suspicious, but certainly the market doesn't like results to be as complex as they were yesterday, and it will take a while for investors to be satisfied with the forecasts on which they are basing their valuations for Group 4 shares.

The company operates in a highly competitive environment. In the UK, there are 2,000 other companies operating as manned guards. There are opportunities in emerging markets but in the US, a key part of the organic growth detailed yesterday, progress is likely to slow.

At 136.25p, the stock is up 18 per cent since we tipped it as a "medium-term banker". The gains have come quicker than we expected. Take profits.

Greggs the baker is still hot stuff

Greggs the baker is on a roll. A flaky, greasy, pastry-encased sausage roll. We can't scoff enough of its artery-clogging, cockle-warming savouries. The family-controlled baker reported a 15.3 per cent jump in pre-tax profits yesterday.

The company's management team is well respected for using its loaf, so the City is happy enough with its plan to venture away from its northern heartland. It opened 35 new shops last year, net of closures, and is on course to increase its estate from 1,250 to more than 1,700 by 2010.

After tinkering with its core Greggs chain ­ repainting it in warmer colours and splashing the words "freshly baked" around the place ­ the group reckons it has found a tasty format and is planning to open twice as many new shops next year. It has plenty of cash to splash on the roll-out.

Bakers Oven, its premium brand with in-store bakeries, is back on track thanks to new management and a new look. Its underlying sales growth of 6.3 per cent outpaced even the 4.9 per cent its core Greggs' division managed, and both chains have started the new year well.

Greggs has promised to increase dividends faster than earnings, but even then there remains the possibility of a cash handout to shareholders.

The shares, up 115p to £44.45p, have risen faster than a cottage loaf since we tipped them last September but with so much to look forward to, we see no reason to stop guzzling.

Superbug not enough to buoy NeuTec

The number of stories about methicillin-resistant staphylococcus aureus ­ that's MRSA, the hospital superbug, to you ­ rose sharply last summer, prompting a jump in the share price of NeuTec Pharma. This fascinating biotech, developing a potential treatment for the infection for launch by the end of the decade, then raised £24.5m from a placing of shares at their newly inflated price.

And no one is complaining at this stage. Opportunism is precisely what is needed from managements in the cash-strapped biotech sector, and NeuTec now has enough cash to pay for a big trial of the MRSA drug, and to build a salesforce to market its more advanced treatment for a dangerous blood-borne fungal infection. Those who invested in the placing have seen the stock rise from 490p to 677.5p yesterday.

Unfortunately, it is hard to justify a £200m market value for the company on current sales projections, even with the frisson added by the suggestion that its products might be useful against cancer. The anti-fungal drug, Mycograb, is progressing through the European approval process, with the first sales expected next year, but NeuTec must wait until widespread use in Europe proves the drug is safe before it can be launched in the more lucrative US market. There was also disappointment that we may not get a report back from the first MRSA trial until next year. Avoid.