Aegis offers opportunity for the patient

Aegis; Yule Catto; Regent Inns
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The Independent Online

Not much more than a year ago, there were few more conspicuous high-flyers than Aegis, the media firm that specialises in buying space for advertisers. Then, of course, the recession struck adland and the result has been a 65 per cent decline in the share price.

Not much more than a year ago, there were few more conspicuous high-flyers than Aegis, the media firm that specialises in buying space for advertisers. Then, of course, the recession struck adland and the result has been a 65 per cent decline in the share price.

The company, led by Doug Flynn, the chief executive and a former News International executive, reported a rare set-back yesterday. Interim pre-tax profit fell by one-fifth to £27.2m, even though revenue, mostly fee and commission income, expanded 17 per cent to £248.5m. Turnover figures, which include monies paid by clients to advertising outlets through Aegis, expanded by 8.2 per cent to £3.05bn.

The seeming contradiction between revenue growth and sliding profits is a common enough one for relatively young, fast-growing businesses like Aegis. Two problems – the savage downturn in the Argentine economy and the collapse in the US tech sector – caused a £6.3m negative earnings swing from a year ago. Add in a further £5.6m in start-up investment and infrastructure costs, and the cumulative impact turned what could have been modest growth into a decline.

That said, Aegis is still swimming against the current. Advertising revenue shows no sign of bottoming out. Cautious predictions a few months ago that the fourth quarter would see a modest rebound now seem wide of the mark. Already some analysts believe that the earliest date for a return to growth could be the second-half of 2002.

Against that tough back-drop, Aegis has a couple of advantages. Specialist, independent buyers not tied to the big agency conglomerates like WPP Group or IPG, seem a good bet to continue to gain a bigger share of their niche markets. The UK firm also has a fast-growing market research business, though it is far too small to act as a separate engine should the main buying business come under sustained pressure.

Mr Flynn is creditable when he says that company executives aren't pushing for a quick merger with WPP. Whether that is good for shareholders, depends on a knock-out bid materialising above 150p – a prospect that seems unlikely anytime soon.

With 2001 earnings per share forecast at 4.9p, that puts Aegis on a prospective multiple of 18, falling to 15 in 2002. The shares, up 2.25p at 88.25p yesterday, stand at near three-year lows and offer patient investors a long-term buying opportunity.

Yule Catto

Is Yule Catto about to see an enduring turnaround? The specialist chemicals and pharmaceutical products group has had a tough time recently, most notably due to last year's oil price surge causing full-year earnings to collapse.

Yesterday, the firm reported that profit before taxation, amortisation and exceptional items for the six months to June fell to £18m, from £25m a year earlier. A poor result, one could be forgiven for arguing, even if it did mark a decent rebound from the figure of £11.1m recorded in the second half of 2000.

Much of the half-on-half advance was derived from a decline in raw material prices for oil-based raw materials such as vinyl acetate and butadiene. And management was optimistic that the reduction in input prices has further to go in the second-half.

Less encouraging was a 1 per cent fall in sales in continuing operations to £236m. Going forward the picture is far from clear. Yule talks, rather cryptically, of volumes "holding up well ... giving us cautious optimism for the short-term". That's fine, as far as it goes, but it provides investors with few clues for 2002, though the current trend of rising selling prices and falling raw materials costs offers some grounds for optimism.

Further out, the construction of a £20m synthetic latex plant in Malaysia is progressing according to schedule and can be expected, post-commissioning, to make a contribution, perhaps from the second-half of next year. This will efficiently serve its growing market for dipped gloves in South-east Asia. The plant's capacity should also find some demand in Europe where the market for speciality latex is seeing decent growth. The caveat, as always, is that the profitability of such polymer products can be easily disrupted by rising oil prices.

Trading in the shares, which fell 8.5p to 187.5p, was muted yesterday. But that still leaves the stock up 14 per cent since January and close to double year ago levels.

With a consensus forecast of earnings per share of 20p, Yule stands on an undemanding p/e of just more than nine. And there is some encouragement that the dividend was tweaked 4.3 per cent higher to 4.9p. With a forecast pay-out of 12p making for a prospective yield of 6.5 per cent, there are merits to holding Yule's stock.

Regent Inns

After an accounting fiasco and profits collapse in 1998, the turnaround at Regent Inns is continuing apace. The group, which owns and operates bars, hotels and restaurants, is shifting the business from under-performing, older, unbranded pubs to developed bars such as Walkabout and Jongleurs.

Year to June pre-tax profit grew 16 per cent to £15.6m, while turnover, substantially aided by an acquisition, rose 24 per cent to £99m. The total dividend gained 10 per cent to 4.93p. Regent's new management has grown cautious on expansion, no doubt due to the group's £55m borrowings. Operating cash flow, however, is growing fast enough to keep ratios healthy.

The stock, down 1.5p to 140p, offers decent growth prospects as outlets are rolled out over the next three years. One to watch.

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