The Investment Column: US electricity deal sparks up repair group Homeserve

Instore; BTG
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The Independent Online

Our view: Buy

Share price: 1,723p (+106p)

The emergency repair group Homeserve sealed what could prove to be a truly transformative deal yesterday, giving itself access to another 3.4 million potential customers in the US. The tie-up with the electricity group FirstEnergy may take several years to make a serious impact on the company's bottom line - and will even be marginally dilutive to profits in the current financial year. However, in the longer-term the deal looks likely to give the group a strong foothold in a massive market - where it currently promotes its services to only about 1.4 million customers.

Back home, prospects also continue to look strong for the business. Policy sales growth in its last financial year was an impressive 30 per cent, boosted by thousands of homeowners seeking home protection before what was forecast to be one of the coldest winters on record. In the event, it wasn't, helping to bolster Homeserve's bottom line as well.

The company now markets its UK services - via a string of partners - to a potential customer base of more than 21 million households in the UK, but only has a fraction of these as signed up customers. This leaves it endless organic growth opportunities in its domestic market, and strong cash flows to continue exploring opportunities abroad.

Although the shares are already up almost 40 per cent this year, the group's enormous potential justifies its rating.

Instore

Our view: Avoid

Share price: 32.25p (+4.75p)

Angus Monro spent three and a half years and more than £16m transforming the bulk of the Poundstretcher retail estate to a new format called Instore. The refit was supposed to make the chain more upmarket and more profitable. Has it been worth it? Trevor Coates, his successor at Instore, doesn't seem to think so.

Since taking over in March, Mr Coates, who used to run the cut-price food chain Aldi in the UK, has been busy working on a "strategy review" of the business. Yesterday be unveiled his conclusions. Despite Mr Monro's efforts, Mr Coates found no difference in performance between the old Poundstretcher format and the new Instore concept. This means there is little point in converting the rest of the estate to Instore.

The key pillar of Mr Coates' strategy going forward is returning the group to its "value" retailing past. That means taking it downmarket again. The fashion items Mr Monro stocked are out. At one point, a quarter of Instore sales came from such items. Currently this figure stands at 12 per cent and will be cut to less than 10 per cent.

In their place will come more health and beauty products, homeware, higher value merchandise like electricals and more seasonal stock - gardening equipment and sunglasses in summer and Christmas decorations in winter. Mr Coates also plans more promotions backed up by extra advertising.

In the short time he has been at the helm of the group, there has been a marked improvement in its performance. Like-for-like sales over the past 24 weeks rose 7.3 per cent. Cash flow has also improved.

Mr Coates certainly has incentives to make a good go of it at Instore. He stands to make £6m if he can get the group's shares up to 60p over the next three years. However, he still has a lot of hard work to do. And competition from the likes of Tesco, Asda and Woolworths is unlikely to ease up.

In the long-term, the big question facing Instore is whether there is any room for it on the high street given how overcrowded the discount retail sector is these days. With the stock trading at 27 times 2008 forecast earnings, it is best avoided.

BTG

Our view: Buy

Share price: 130.5p (+2.5p)

BTG has had a good two days. The company is in the process of turning itself from an intellectual property company into a life sciences firm. On Wednesday, it unveiled the sale of its WebNav online navigation tracking patents for $5m and a share of future profits.

Yesterday, came news that TolerRx, a licencee of its diabetes treatment TRX4, had raised enough money to finance late stage clinical trials of the drug. If TRX4 makes it on to the market, BTG can expect substantial royalties from sales of the product, which addressed a billion-dollar market.

In June, the company said it would take its key Varisolve treatment into Phase II clinical trials alone, which disappointed the City and sent the shares tumbling. Investors wanted to see it sign a big pharma partner to help develop the varicose vein treatment. BTG now hopes to do a deal some time next year.

Nevertheless, Varisolve remains a potential blockbuster and BTG continues to have one of the most impressive pipelines in the sector. Investors should use the recent weakness in the shares as a buying opportunity.

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