The Investment Column: Time to take profits at British Land

Perilous journey ahead for Tomkins - Imagination Technologies should ride out setback
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The Independent Online

Few FTSE 100 companies are so associated with one person as British Land is with John Ritblat.

Few FTSE 100 companies are so associated with one person as British Land is with John Ritblat. He has had his run-ins with the City in recent years and, after pressure to split the roles of chairman and chief executive, has brought in Stephen Hester, formerly the finance director at Abbey National, as chief executive. The new man admits that "John Ritblat has forgotten more about property than I will ever know" and Mr Ritblat is still very much in evidence as chairman. But at least the corporate governance concerns ought now to give way to a proper focus on the portfolio.

British Land's interests are split between office and retail property, with retail accounting for 52 per cent of net asset value and offices at 43 per cent. Broadgate, home to some of the City's biggest investment banks, is the most valuable single site.

Readers who took our advice in May to buy British Land at 660p have done considerably better than most people who bought their own properties at the same time. Yesterday's share price fall, on the back of interim results, still left a gain of 18 per cent in six months.

Net asset value per share was up to 1,049p, now more than 20 per cent higher than in September 2003 as the office market rebounded at the same time as booming retail spending kept shop rents high.

So retrospective applause, but reasons to be concerned about the future. Yields on the supermarket portfolio were lower than expected, and with retailers expecting tougher trading from now, it could be that retail property prices go south. British Land's predictions for rising City rents may also prove too optimistic.

Proposals for the introduction of Real Estate Investment Trusts (Reits), to which property companies could switch for tax reasons, has put a little froth into property shares this year. But conversion to a Reit would be more beneficial to rival Land Securities, who could then spin off the fast-growing Trillion property outsourcing business, than it would for British Land.

Take profits.

Perilous journey ahead for Tomkins

Tomkins has been many things. The company started out in 1925 as a maker of buckles and fasteners. In its most recent incarnation it was the "buns to guns" conglomerate, owner of Smith & Wesson and Hovis. These days, still a conglomerate, it is mainly a supplier to the automotive industry and a manufacturer of air conditioning.

Tomkins' results were not especially disappointing yesterday, but the comments on more recent trading were. Its shares fell nearly 6 per cent to 252p, the worst FTSE 100 performance.

There has been particular weakness in the market for car spares. The Canadian chief executive, Jim Nicol, says this is because Americans are driving less now that gas (sorry, petrol) prices are high, so their cars are wearing out less quickly. And because of the hurricanes.

If those sound like poor excuses, at least there is no mystery about the other challenges facing Tomkins. The dollar, in which it makes 65 per cent of its sales, was $1.82 to the pound in the most recent quarter, compared with $1.61 the year before. Yesterday it was $1.88, so the pain for sterling shareholders is only getting worse.

Demand also looks pretty precarious in the new car market, at the same time as steel and other important raw materials costs have rocketed. Tomkins is passing on most of the costs so far, but it is hard to see that continuing. Tomkins' markets are unexciting at the best of times. Now, they are perilous. Avoid.

Imagination Technologies should ride out setback

Shares in Imagination Technologies, the chip designer, fell 9.2 per cent yesterday after its interim results missed forecasts. This was disappointing but not a disaster.

The main surprise was that turnover for the six months to 30 September was flat, with revenue from its Pure digital radio business down from £7.6m to £6.7m. This meant that the company's half-yearly profit and loss account hardly looked stunning, although pre-tax losses fell from £3.1m to £2.8m.

However, the point about Imagination is its growth potential. Its core business is designing the software integrated into microchips which power the latest electronic devices, be they mobiles, car navigation systems or digital TVs.

It earns revenue from licence fees every time a chip designer buys its systems. Then, once a chip is embedded in a device, Imagination earns a royalty on every device sold. Licence revenues were £5.9m, up 18 per cent. Most of the devices are coming to market only now, so royalties are coming soon. Crucially it has 24 chip designers using its technology - a 20 per cent increase - representing significant future royalty income as the devices they power move into production and are adopted by the mass market.

Imagination is locked and loaded for future growth. A short-term hiccup should not distract from the fundamentals. Buy.

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