Buoyant Medeva seeks a new fix

THE INVESTMENT COLUMN

Shares in Medeva, the drugs group, have proved surprisingly resilient to shocks. At 228p, down 1p yesterday, they have recovered all of the precipitous fall of two years ago, when the company's previous go-go rating was severely dented by a profits warning. Half the 13p loss recorded last Tuesday after the abrupt ending of merger talks with rival Fisons has also been clawed back.

Their strength is partly due to Medeva's continuing ability to deliver the goods, despite the City's increased scepticism about its strategy of acquiring and developing late-stage products and businesses. Half-year profits to June, up 31 per cent to pounds 28.9m, were bang in line with last week's estimate alongside the Fisons announcement.

The problem is that Medeva remains heavily reliant on one product, Methylphenidate, a drug that helps calm down unruly children and, increasingly, adults as well. In effect, all the sales growth in the half-year came from this one preparation, which has increased its share of the main US market to 67 per cent and provided part of a two-point gross margin gain.

Medeva counters that most of the earnings come in the second half, when its Fluvirin flu vaccine is sold ahead of the flu season. Orders are already 40 per cent up to a record.

Even so, the drug accounted for much of the top-line growth for the whole of 1994 and sales will almost certainly come under pressure if, as seems likely, Johnson Matthey's generic competitor receives US regulatory approval by 1996.

Medeva is pinning its hopes on a range of newer products between now and then to fill the pipeline, although many have their own problems. The albuterol generic metered dose inhaler, to attack the $400m-$500m market for asthma dominated by Glaxo and Schering-Plough, already looks a bit old-fashioned, given its dependence on soon-to-be-banned CFC gases. Inhalon, bought in December, launched its new inhaled anaesthetics on time earlier this month, but it still faces a lawsuit from a BOC-owned rival company. Even Hepagene, which holds out the prospect of a breakthrough in preventing hepatitis B, is still embroiled in patent litigation.

The cash position remains strong, after net cash balances doubled to pounds 28m in the six months.

With borrowing capacity giving an additional pounds 100m firepower on top, Medeva would be well placed to pick up any unwanted drugs squeezed out of the merger of Glaxo and Wellcome.

Profits of about pounds 80m this year would put the shares on a forward rating of 14. High enough, although the price may continue to be buoyed by bid speculation, despite the assertion yesterday by Bernard Taylor, the chairman, that the company is not for sale.

Paper firm still a tidy package

David S Smith's shares have risen relentlessly over the past three years, buoyed by improving conditions in the highly cyclical paper-making industry and latterly by persistent takeover rumours. Trading at 240p in 1992, they dipped 13p to 651p yesterday as dealers took to heart the company's dismissal of whispers that it is about to fall to International Paper, its much bigger rival.

Speculation has boosted the shares but, despite the froth, Smith is looking good value after results for the year to April right at the top of analysts' expectations. The consensus forecast of pounds 90m was handsomely beaten by reported pre-tax profits of pounds 99.7m, a 136 per cent improvement on last year's result, struck from sales of pounds 1.03bn, up 31 per cent. The 13p dividend, up 21 per cent, was covered four times by doubled earnings per share of 50.4p.

The cycle is moving in favour of the core packaging and paper operation - two thirds of group sales and 80 per cent of profits - and analysts think the peak will not be reached for a couple of years. That should ensure that margins, which have more than doubled from 5.9 to 13.4 per cent over the past two years, continue to widen.

Smith is Britain's largest waste paper recycler and one of the biggest in Europe, so it is well placed to benefit from an increasing trend towards reusing paper. Over the past five years, waste paper recovery rates in Germany have jumped from 43 to 62 per cent. A similar trend is expected in the UK.

But making paper is cyclical, so one of Smith's biggest attractions is its increased diversity. Purchases of Kayserberg, the French packaging group, and Spicers, the office product wholesaler, are looking increasingly attractive.

Office products increased profits from pounds 15.8m to pounds 23.8m in the year.

On the basis of Warburg's forecast of pounds 130m pre-tax profits this year, giving earnings per share of 62p, the shares stand on a prospective p/e of 10.5. In the year to April 1997, that rating falls to 9.3 with profits expected to jump again to pounds 150m.

The shares should stand at some sort of discount to the market as the peak of the cycle approaches but that rating seems to overdo the caution. Against the background of a fast-consolidating industry, the shares are still attractive.

Food is tougher for Dalepak

Food manufacturers have had it tough over the past couple of years. Supermarkets have forced supplier prices lower, packaging costs have been rising sharply and choosy consumers have kept the lid on prices in the shops.

For smaller groups, such as Yorkshire-based Dalepak Foods, the only hope has been to keep coming up with innovative ideas ahead of larger rivals such as Birds Eye or Northern Foods. But even with a steady stream of new products, including minted lamb grillsteaks and vegetable tikka grills, little Dalepak has been struggling.

Long-suffering investors have seen the share price fall steadily from 385p at the beginning of 1993, and it dropped a further 14p yesterday to 100p after results marred by a chunky exceptional charge.

Pre-tax profits for the year to April increased from pounds 414,000 to pounds 632,000 on sales up 15 per cent to pounds 42.5m. They would have been more than twice as high but for a pounds 731,000 charge largely relating to redundancy costs associated with last year's acquisition of the Ross Young frozen meats division.

That deal is proving harder to digest than first imagined and the increase in production levels and training of new staff has caused disruption. The acquisition lost nearly pounds 1m last year and will seriously affect the first-half figures.

Dalepak says work at the burger and grillsteak business has been completed but more needs to be done at the Hull pastry factory. Fierce competition makes the company even more dependent on pushing through price increases and seeing a let-up in raw material costs.

BZW, the house broker, is forecasting profits of just pounds 500,000 for 1996 and pounds 2m the following year. That puts the shares on a lowly rating of 8.5 two years out. Even at that level they are unlikely to excite, but with a bid from a larger food group such as Campbells of the US a possibility, they should at least not fall any further.

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