Alliance Unichem: one for the medicine chest

Xstrata; Soco International
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The Independent Online

Investors in Alliance Unichem, Europe's second-largest drugs wholesaler and pharmacist, are unsure of which way to turn. Demand for cough mixtures and headache pills is unlikely to benefit from the expected global economic recovery. Moreover, the company operates in a two-horse market, which is highly regulated. Small wonder the shares have struggled over the past few weeks.

Yet as long as there is the slightest doubt about the prospects for the economy, the company's defensive qualities make it a highly attractive investment. Indeed, the shares staged a mini rally yesterday after annual results showed that defensive does not necessarily mean low-growth.

About half of the 18 per cent uplift in turnover, to £7.3bn, was due to acquisitions. Earnings per share were up a less impressive 10 per cent at 33.4p. Last year's story was the integration of the Dutch Interpharm purchase, although there were also deals in the UK and Norway. A provision for a £1.4m fine levied by the French government because of the company's former discounting policies was the only fly in the ointment.

Jeff Harris, the executive chairman, says there's plenty of scope to drive earnings from cost-cutting after the recent deals. But he's also got his eye on further purchases in Germany, Poland and Scandinavia, where the company's distribution capabilities are fairly weak. There are no big pharmacy chains left for Mr Harris to buy, which means expansion in the retail market depends on buying up independent drugstores one by one. The deals may be small, but the company can bring its considerable buying power to bear in each case.

Investors may doubt Mr Harris's claim that the potential to exploit the company in new regional markets is huge. All the same, Alliance Unichem should have little difficulty delivering low double-digit earnings growth as it battles it out with German rival Gehe.

House broker Merrill Lynch anticipates earnings per share will rise by 12 per cent to 37.2p this year, touching 41.7p in 2003. At about 15 times forward earnings, the shares, up 25p at 553.5p, are not cheap given that it is hard to see the earnings growth accelerating. Investors who bought in on our tip six months ago at 478p will be tempted to take profits, but in an uncertain world the company's clear earnings visibility makes the shares worth holding.


Xstrata, the mining company which can claim to be the biggest float in London for a year, made a respectable debut yesterday – unsurprising, perhaps, given that its UK initial public offering was seven times oversubscribed. Institutional buying pushed the company's shares up 113p at 983p. Retail investors will have to wait until Monday to deal.

The group has shifted its primary listing from Zurich to London, raising £840m in the process to help finance its $2.5bn (£1.7bn) cash and shares acquisition of the Australian and South African coal assets of Glencore. Xstrata is not a new company, but it is under new management, led by former Billiton finance director Mick Davis.

His plan is to diversify Xstrata away from its reliance on coal assets, which represent 60 per cent with the Glencore acquisition (the remainder being zinc and ferro alloys). Investors need to be convinced that the highly regarded Mr Davis can pull off further deals at good prices, as most analysts are not terribly excited about the portfolio as it stands.

Aside from Mr Davis' reputation, Xstrata's other attraction is that it was floated at a considerable discount to its peers. Even after yesterday's rise, it trades on a forward multiple of 10 times this year's earnings – compared with a forward p/e of 14 for larger rivals Anglo American, BHP Billiton and Lonmin.

The discount reflects Xstrata's status as a relatively unknown quantity, although there are also fears that Glencore will one day dump all or part of the 40 per cent stake in Xstrata it acquired in the coal deal. Add in the fact that the entire mining sector is trading on a stretched rating, which has priced in a global economic recovery that still seems very uncertain, and Xstrata does not look compelling.

Soco International

Not long ago Soco International, the oil tiddler, was talking up prospects of striking a deal in North Korea. But the world has changed and the excitement that has driven the company's shares up more than 100 per cent this year has surrounded a longstanding drilling project in a rather less risky country, Vietnam. Soco plans to drill four wells there this year, and seismic surveys suggest it could be sitting on some 400 million barrels of oil. Ed Story, the chief executive, says the chances of success are high, and he and fellow directors have been putting their money where their mouth is, periodically buying shares in recent months.

The Vietnamese government is sharing the costs of the drilling programme, and if Soco finds black gold gushing forth, the company would seek to sell into the Japanese market. But it's still a risky venture.

Yesterday's full-year results showed the weak oil price knocking profits from existing oil-producing assets in Yemen and Tunisia down 47 per cent to £9.3m. Parts of those fields may well be sold, Mr Story said. The shares fell 11.5p to 241.5p, valuing the company at £171m.

One for the brave.