Behind Zeneca's glamour rating

THE INVESTMENT COLUMN

Zeneca has been the object of so much takeover speculation recently that nobody seemed terribly interested in interim figures yesterday from the former ICI drugs arm. That is a mistake, because if the company's robust rebuttal of bid talk is to be believed, the market will have to start valuing Zeneca on fundamentals once more.

The bid story is unlikely to go away as long as the drugs industry continues to consolidate at its current rapid rate. Zeneca is plainly still attractive, if expensive, and Roche, the rumoured predator, is perhaps the only company with the firepower and the acquisition history to be a serious contender.

But pounds 15bn, which is what it would probably have to pay to secure control of Zeneca, would be a massive undertaking even for Roche. It would be paying a pharmaceutical multiple for a big chunk of much lower-margin agrochemical and speciality chemical earnings. Perhaps most importantly, David Barnes, chief executive, has made things quite clear - Zeneca and Roche are not talking.

How then do Zeneca's figures and its relatively fancy rating stack up together? Yesterday's half-time profits, up 44 per cent to pounds 506m, were flattered by last year's pounds 100m exceptional charge, but even on a comparable basis, there was a 12 per cent improvement. Earnings per share, up 41 per cent to 35.8p, allowed a 0.5p rise in the dividend to 11.25p.

Zeneca's return on sales, at 20.4 per cent was a record, as were sales from the core drugs arm, which breached pounds 1bn for the first time in a six- month period. The underlying business is as strong as ever despite cautious hints about second-half margins, expected to be squeezed by the costs of promoting new treatments. Analysts describe Zeneca as the sector's lowest-risk business.

That reflects its solid new drugs pipeline, which includes four new treatments for cancer, an innovative pill for asthma and a schizophrenia drug. It is also an appreciation of the recent Salick acquisition, which took Zeneca into managed cancer care for the first time.

Salick owns specialised cancer clinics in the US and represents the future of health care in America and, probably, Europe as well. Giving Zeneca exposure to the growing market for cancer treatment, even without new drugs, it is a sensible diversification and, on the basis of a 50 per cent initial stake, a relatively low-risk venture.

Profits are forecast to grow from an underlying pounds 797m last year to pounds 860m this time and pounds 960m in 1996. That puts the shares, down 23p to 1,097p yesterday, on a prospective price-earnings ratio, 18 months out, of 16. On a sizeable premium to Glaxo's 13.5 times multiple and a slightly better rating even than US stocks in the sector, the shares still appear to reflect a bit of bid froth. While a takeover remains an outside chance they probably won't fall far, but equally the upside looks limited.

Time for Shell to grit its teeth

Shares in Shell were suffering yesterday from the problem all cyclical companies face once the market sees confirmation of an earnings plateau ahead. Results may be impressive but the City always looks forward and the 15p fall to 759p reflected its concerns.

Interim results were exceptionally buoyant, with net income in the second quarter up 90 per cent to pounds 1.28bn. Admittedly, the number was flattered by an pounds 80m special credit from sale of copper interests in Chile and a pounds 77m currency gain. But chemicals continued their much-improved performance, making a pounds 313m profit instead of a pounds 41m loss a year earlier.

The comparison is with the last of the bad quarters before the recovery began, and the latest quarter includes consolidation for the first time of new chemical subsidiary Montell, so the underlying trend compared with the immediately preceding quarter is rather flat. But there was little to complain about, especially as firmer oil prices also boosted exploration and production profits 47 per cent.

The real difficulty was with Shell's comments on the oil market and the rather gloomier than expected forecast for chemicals, the heart of Shell's recovery over the past year.

Oil prices remained strong until April but fell sharply at the end of the second quarter, with Brent now trading at about $16 a barrel and expected to stay around that level for the current quarter.

Ignoring minor shades of opinion, there was little here that was not built into the market's expectations. But one problem will continue to undermine Shell's shares relative to the rest of the oil sector.

Shell trades at a 10 per cent premium to the market. BP, which has much better dividend growth prospects because it starts from a lower point, trades marginally below. The whole sector is at risk from weaker oil and chemical markets over the next couple of years, and Shell more so than its peers.

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
News
Mock the tweet: Ukip leader Nigel Farage and comedian Frankie Boyle
peopleIt was a polite exchange of words, as you can imagine
Life and Style
fashion
Life and Style
Britons buy more than 30 million handsets each year, keeping them for an average of 18 months
tech
Arts and Entertainment
TV Presenters Ant McPartlin and Dec Donnelly. Winners of the 'Entertainment Programme' award for 'Ant and Dec's Saturday Night Takeaway'
musicAnt and Dec confirmed as hosts of next year's Brit Awards
Arts and Entertainment
Orson Welles made Citizen Kane at 25, and battled with Hollywood film studios thereafter
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Market Risk Manager - Investment Banking - Mandarin Speaker

£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Day In a Page

Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes
Independent writers remember their Saturday jobs:

Independent writers remember their Saturday jobs

"I have never regarded anything I have done in "the media" as a proper job"
Lyricist Richard Thomas shares his 11-step recipe for creating a hit West End musical

11-step recipe for creating a West End hit

Richard Thomas, the lyricist behind the Jerry Springer and Anna Nicole Smith operas, explains how Bob Dylan, 'Breaking Bad' and even Noam Chomsky inspired his songbook for the new musical 'Made in Dagenham'
Tonke Dragt's The Letter for the King has finally been translated into English ... 50 years on

Buried treasure: The Letter for the King

The coming-of-age tale about a boy and his mission to save a mythical kingdom has sold a million copies since it was written by an eccentric Dutchwoman in 1962. Yet until last year, no one had read it in English
Can instilling a sense of entrepreneurship in pupils have a positive effect on their learning?

The school that means business

Richard Garner heads to Lancashire, where developing the 'dragons' of the future is also helping one community academy to achieve its educational goals
10 best tablets

The world in your pocket: 10 best tablets

They’re thin, they’re light, you can use them for work on the move or keeping entertained
Lutz Pfannenstiel: The goalkeeper who gave up Bayern Munich for the Crazy Gang, Bradford and a whirlwind trawl across continents

Lutz Pfannenstiel interview

The goalkeeper who gave up Bayern Munich for the Crazy Gang, Bradford and a whirlwind trawl across continents
Pete Jenson: Popular Jürgen Klopp can reignite Borussia Dortmund’s season with visit to Bayern Munich

Pete Jenson's a Different League

Popular Klopp can reignite Dortmund’s season with visit to Bayern
John Cantlie video proves that Isis expects victory in Kobani

Cantlie video proves that Isis expects victory in Kobani

The use of the British hostage demonstrates once again the militants' skill and originality in conducting a propaganda war, says Patrick Cockburn
The killer instinct: The man who helps students spot potential murderers

The killer instinct

Phil Chalmers travels the US warning students how to spot possible future murderers, but can his contentious methods really stop the bloodshed?
Clothing the gap: A new exhibition celebrates women who stood apart from the fashion herd

Clothing the gap

A new exhibition celebrates women who stood apart from the fashion herd
Fall of the Berlin Wall: Goodbye to all that - the lost world beyond the Iron Curtain

The Fall of the Berlin Wall

Goodbye to all that - the lost world beyond the Iron Curtain