Aegis pours cold water on upturn

Jurys out as hotels group peaks; Yule Catto needs to kick the habit on omeprazole
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The Independent Online

Last month, the WPP boss and advertising sage Sir Martin Sorrell pronounced that the industry was emerging from what he famously predicted would be a "bath-shaped" recession. Yesterday, his counterpart at Aegis, Doug Flynn, joked that he would rather not imagine the sight of Sir Martin climbing out of his bath.

That's not only for taste and decency reasons. Mr Flynn is simply not ready to believe in the dramatic turn of fortune that the stock market already seems to have priced in.

Aegis is Europe's largest independent media buyer, purchasing advertising slots on behalf of clients including BMW, Disney and Coca-Cola. Yesterday the group set out a cautious view of prospects for the next 18 months.

The different geographical focus of Aegis might explain the downbeat tone. Because it does a greater proportion of its business in Europe than WPP, the company expects only "slow progress" into 2004. European business tends to be higher margin than in the US, but the biggest markets in Europe continue to struggle.

Mr Flynn even played down talk that advertising markets across the globe will get a kick-start from the Olympic Games and the US presidential elections next year. These one-offs will account for less than 1 per cent of total ad spending.

There is anecdotal evidence of increased consultancy work - advising clients on future ad campaigns - and this tends to translate into business for media buyers after six months. With a broad portfolio of clients and a little light restructuring behind it, Aegis will be quicker than most to benefit from global economic recovery.

But the market is already betting that profits will outstrip anything Mr Flynn was able to hint at yesterday. The shares trade on more than 20 times the current consensus of pre-goodwill earnings forecasts for 2004, which can only be justified if that consensus is well beaten. The ad industry may well be stepping out of the bath, but there is still the risk it will slip on the soap. Avoid.

Jurys out as hotels group peaks

Anyone would think the management of Jurys Doyle, the Irish hotels group, had spent the past six months in Cork kissing the Blarney Stone, from a glance at the company's share price. A smooch with the rock is said to endow the kisser with the gift of winning persuasiveness, which, it seems reasonable to assume, might explain the 60 per cent rise in the company's shares in a year besieged by war, deadly viruses and global recession.

Yet a glance at the Dublin-based group's interim results told a different story yesterday, suggesting the strong performance was down to a lot more than just smooth talking. Profits before tax and exceptionals for the first half were just 5 per cent lower at €29.7m. If a gain from the sale of two non-core three-star properties is included, profits rose.

Tellingly, the group's revenue per available room - a key industry measure - fell by only 2 per cent at its UK and US properties and climbed 5 per cent at its Irish sites. This reflected the strength of the group's Jurys Inn brand, a no-frills concept that sits at the top of the three-star market, which bucked the industry trend and increased room rates. Located in city centres, the sites keep margins high and room rates low by cutting back on room service and hotel porters. The company plans to have 18 Jurys Inns trading across Ireland and the UK by 2005.

We highlighted the attractions of this company last October, but the shares, at 662.5p, now trade on 15 times this year's earnings. The market has chased this one high enough for now.

Yule Catto needs to kick the habit on omeprazole

Drug dependence can be a grim experience for investors in chemicals companies. Yule Catto, an otherwise healthy-looking group producing the chemicals used in surgical gloves and developing photos, has just enjoyed a high from a drug called omeprazole. This is the heartburn treatment invented by AstraZeneca and now being sold as a copycat medicine by Schwarz Pharma of Germany, using Yule Catto to produce the main ingredient.

Partly as a result of sales of omeprazole, its most important product, Yule Catto's 90 per cent increase in interim profits to £36.0m was well ahead of expectations yesterday. But now comes the cold turkey. Last month, two new versions of omeprazole came unexpectedly on to the market and it is anyone's guess at what level Yule Catto's sales will stabilise. There could be no significant earnings growth next year.

The group's results continued an impressive record of cash generation, and there has been a lull in capital spending while it transfers operations to a new factory in Malaysia. Although debt, at £181m, looks high, interest payments are comfortably covered. The dividend yield on the stock (up 2.5p to 335p) is 4 per cent, which makes it worth holding, but new investors may want to wait until the omeprazole uncertainty is out of its system.