A brighter side to Mogadon man Unichem

Alliance Unichem; Taylor & Francis; Trafficmaster
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The Independent Online

Alliance Unichem, the pharmaceuticals wholesaler and retailer is one of the Mogadon men of the market. Its business is dull though worthy and its profile is so low as to be almost subterranean. Indeed if it wasn't for Tory leadership candidate, Kenneth Clarke, sitting on the board – he has just moved from chairman to non-executive deputy chairman – the company would probably receive hardly any coverage at all.

But investors ignore this business at their peril. It has consistently delivered earnings growth of 10 per cent and did so again yesterday with interim results better than many expectations. And it is about as defensive a stock as you can get in a bear market. Its core business is the wholesaling of healthcare products to pharmacists, governments and manufacturers. It also has a retail arm including the Moss chain of chemists in the UK. It has no US exposure at all.

Alliance Unichem's business tends to be remarkably resilient in times of recession as government spending on healthcare tends to be reasonably constant. That the shares fell 7.5 per cent yesterday to 478p perplexed some analysts but could represent a buying opportunity.

Ironically the main reason for the fall in the shares was concern over one of the group's key strengths. The worry is that increased government pressure on healthcare budgets will affect Unichem's margins. Jeff Harris, who has moved up from chief executive to chairman, admits that margins in southern Europe were not as good as hoped because France and the UK put a squeeze on healthcare budgets. But he says margins should improve in the second half and continue to strengthen longer term.

Going forward Alliance Unichem wants to increase its presence in major European markets such as Germany, Scandinavia and Poland. The retail arm in particular could do with being strengthened.

Assuming full-year profits of £157m the shares trade on a forward price-earnings ratio of 14. This is a 20 per cent discount to the market, which looks unjustified. Buy.

Taylor & Francis

As a specialist academic publisher, Taylor & Francis has proven among the most resilient stocks in the media sector. That's despite more than tripling since it floated just over three years ago.

Interim results from the company showed decent progress yesterday with the £22.8m February acquisition of Gordon & Breach seemingly bedding down well. The deal helped spur a 12 per cent rise in pre-tax profit to £4.1m as sales advanced 19 per cent to £61m. The dividend was bumped up 10 per cent to 1.32p.

Gordon & Breach raises the company's number of journals by 250 to more than 800. It also brought in 100 new books, taking the total list to 1,800. The acquired titles include the fourth edition, due out in January, of Molecular Biology of the Cell, a textbook whose earlier editions sold 750,000 copies.

One worry in the first-half numbers is the net cash outflow before financing, which nearly doubled to £21m from £11.1m a year ago. Notwithstanding the business's second-half weighting, which saw the cash inflow stand at £9.6m at the full-year stage, it would seem unlikely that those of levels of cash will be generated this year. For 2002, journals, which account for 46 per cent of total sales, are set to boost prices by 11.8 per cent, although higher prices for paper and other production inputs will stop all of the revenue gain flowing to the bottom line.

The shares, down 7.5p to 567.5p, are off an earlier 647p high, but still trade on a demanding p/e of 28 times prospective earnings of £25.5m. That's too high given the current market environment and the execution risk that arises from the need to fuel growth with acquisitions. Reduce.

Trafficmaster

Like the frustrated motorists Trafficmaster purports to help, its investors have been stuck in a jam for much of this year. Six months ago, this column advised prospective buyers to await a better buying opportunity. Yesterday's interim results held little hope that such a time would come soon for the former stock market darling.

Rather than knuckle down and concentrate on one area of the telematics market, its management has been distracted by acquisitions and the lure of Europe. An aggressive revenue target set in March proved a pipedream and its stock, worth nearly 1,200p last year, has never recovered from the June profits warning.

Analysts criticise the company, which monitors jammed roads and offers other hi-tech services to motorists, for its unproven business model and lack of earnings visibility. It made a half-year loss before tax of £7.8m against a profit of £1.2m the year before on sales up from £5.6m to £10m.

Talk at the company is of "turning a corner" but investors should remain wary while Trafficmaster's future remains rooted in fiction rather than fact. Until satellite navigation boxes are installed as standard on the dashboard of new cars, Trafficmaster's revenues remain hard to predict.

Until the company can create demand for its products, like its off-board navigations system, T-nav, its shares will continue to languish. Trafficmaster is struggling to promote its Fleetstar product, which provides traffic information for companies' fleet car customers, and is pinning its hopes on the fourth-quarter launch of T-nav.

HSBC Securities sees the company making losses until at least 2004, starting with a pre-tax loss of £12m this year. Its shares, down 2p to 45p, still look unattractive.

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