Bottom Line: Calmer water after a trading frenzy

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The Independent Online
FOR A time, Bowater looked as if it might be addicted to buying and selling companies.

Seven large acquisitions and countless smaller ones, in as many years, have cost pounds 1.6bn - about 70 per cent of its market value.

A similar number of disposals, raising pounds 429m, has left the Australian tissues business as the only significant remnant of the old Bowater business - and that accounted for less than 7 per cent of sales in the first half.

Now the focus is on organic growth - as shown by a likely 30 per cent rise in capital spending this year. Acquisitions are likely to be in-fill, deals to consolidate its market position - adding to its lipstick-based European costmetics packaging, or taking its market dominance of the US release liner business into Europe.

That might make life at Bowater rather more dull, but also more predictable. The 28p- a-share earned before exceptionals in 1993 was only 3p above the level in 1987 and the level has fluctuated sharply.

On the plus side, margins have risen sharply while gearing has dropped.

Michael Hartnall, finance director, is confident margins - 9.2 per cent in the first half compared with 8.8 per cent last time and 3.8 per cent in 1987 - can continue to increase. But further paper and pulp prices are expected and, while it has managed to pass those on to customers so far, there is no guarantee that that will continue.

The market took note of the more optimistic tone - a sharp contrast to the gloom when it announced final results in March - and marked the shares up 19p to 492p.

If it achieves the pounds 230m expected for this year and pounds 260m next, the multiple of 16 could look rather cheap. But having chased the shares up more than one-and-a-half times as fast as the market over the past five years, that is the least shareholders will expect.

Not one for wimps

WIMPEY is back in black at the half-way stage and for the full year should make twice last year's profits. The disaster of the pounds 112m loss two years ago is firmly behind it. Having put the shares on a premium rating, the market is happy to take the quiet confidence of Joe Dwyer, chief executive, at face value.

According to the bulls, housing volumes are pushing ahead nicely. Margins will rise and Wimpey is an attractive recovery play. But the counter-argument is pretty compelling.

The company is at the wrong end of the housing market (first- time buyers) to make decent margins, given the pressure of high land prices and low house prices on returns. Minerals volumes and prices are moving in the right direction but arguably the company's expressed desire to expand in the US is two years too late.

In construction, margins remain unacceptably low, even by the poor standards of the rest of the industry, and are unlikely to improve without the increased risk implied by taking equity stakes in schemes. The balance sheet is in fine fettle, but questions remain over management's ability to use its fire-power to best effect. Wimpey needs to reduce its exposure to the housing market ahead of the inevitable cyclical downturn but it is not clear where it can buy growth.

On forecasts of about pounds 50m this year and pounds 61m next time, the shares stand on a prospective price/earnings ratio of 15 compared with 13 for Tarmac, which has a better position in housing, a better aggregates market share and higher contracting margins. Expensive.

Medeva's comeback

JUDGING by the stock market's reaction yesterday, Medeva is winning back the fans it so bitterly disappointed last year.

A profit warning in July 1993 sent the stock price plunging from 220p to 100p. Yesterday shares rose by 12.5 per cent, from 128p to 144p, on publication of interim results that showed pre-tax profits ahead 70 per cent.

Medeva attributed the sharp improvement to rising sales of products in Britain and the US. In profit terms, it benefited disproportionately because it has to carry high initial costs. Once sales get going, therefore, more of the revenue drops to the bottom line.

Analysts expect Medeva to make full-year profits of about pounds 58m.

That puts the shares on a forward multiple of 11, equivalent to a 21 per cent discount to the pharmaceuticals sector.

The poor rating reflects Medeva's reputation as one that disappoints and doubts about the implications of the Clinton healthcare reforms.

The shares look cheap, but buyers should proceed with caution.

(Graphs omitted)

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