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Best to stay Friends with Provident

Buy into growing paper maker DS Smith; Oxford BioMedica has prescription to strike gold

Stephen Foley
Thursday 04 March 2004 01:00 GMT
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When the Quaker-founded, Dorking-based Friends Provident announced plans to demutualise and float back in 2000, many were sceptical that the insurer would get to flotation without being bought. It was too small and too parochial to compete with the big Norwich Unions and Legal & Generals of this world, so it was said.

Well, Friends has proved remarkably resilient as a Plc, especially through two terrible years for life insurers. Friends said yesterday annual profits were, as expected, down 16 per cent due to lower investment returns. But it has trumped larger rivals by being the first to produce a so-called "realistic" balance sheet, part of a new solvency regime from the regulator. On the new basis, Friends has over five times enough capital in the group to cover a doomsday scenario of collapsing stock markets, property values, bond yields and interest rates. This should dismiss any fears over its capital strength.

Its capital demands are, in any case, less than other life insurers because its with-profits fund is run as a mutual fund for policyholders alone. Its assets and liabilities are mostly self-contained and with-profits, a capital-intensive product, is now only 10 per cent of its new sales - and falling.

Friends is instead focusing on company pension schemes and protection business. It has been quick to develop IT systems that process much of its business online, making the business it writes more profitable. Personal pensions are still a no-go area for the company while prices are capped at 1 per cent. Despite a contracting market for life and pensions, Friends sales were up 14 per cent over the year. It has improved its market share and squeezed itself into the top 10. The UK savings market is a tough one, however, racked by nervous consumers and heavy regulation.

The company's shares, at 151p, are trading close to its net assets of 160p a share. This makes it reasonably cheap in the sector. Its reliance on a difficult UK market limits its growth prospects, but its shares are a solid hold.

Buy into growing paper maker DS Smith

The worry for investors in DS Smith, the UK's biggest manufacturer of paper, is that profits in this industry are, well, paper thin. Which is why yesterday's acquisition of a cardboard company puts the group on a firmer basis and stiffened shareholders resolve. Despite funding the deal with a £71m rights issue priced at a 39 per cent discount to Tuesday's share price, DS Smith shares went up 9p to 191p yesterday - their highest for four years.

It is spending £170m in total on Linpac, a maker of corrugated packaging used in the transport of consumer goods, especially to supermarkets. Cardboard boxes are less economically sensitive than paper, and the integration of Linpac should yield big cost savings and boost earnings from next year.

All of which coincides with a strengthening of the paper price at last. DS Smith put its prices up last month, following European rivals. It is too early to be certain the price rises will stick, but it is about time that rising waste paper and energy costs are passed on to customers. With economic activity picking up, especially in Asia, hopes are high.

Other areas of DS Smith's sprawling business are also on an improving trend, notably the stationery wholesaling arm which supplies businesses with pens, pencils, pads and paper clips. The expectation is that this division might soon be fat enough to sell.

With the one-for-five rights issue priced at just 112p, taking up the rights is a no-brainer. But now is also a good moment for new investors to buy into this undervalued company.

Oxford BioMedica has prescription to strike gold

It is a dream of every company manager: instead of having to find the cash to develop a potential multi-million pound bestselling product, along comes a charity or government to pay the investment for you.

The dream has come true not once, but repeatedly for Alan Kingsman, chief executive of Oxford BioMedica. The company is working on science so exciting that Cancer Research UK and the US National Cancer Institute are bankrolling big human trials of TroVax, a vaccine for colorectal and breast cancer. They don't want a thing in return, not even royalties on any product. "They just want to cure cancer," says Professor Kingsman.

The things that have drawn these organisations to OXB might scare some investors away: the science is revolutionary and unproven. There might be nothing here at the end of the day. But if it does get proven, OXB could be sitting on a goldmine.

The company, which had £31.8m in the bank at the end of 2003, will spend up to £12m of its own cash a year to fund other trials of TroVax and MetXia, a gene therapy cancer treatment. Many programmes are behind schedule, but the breadth of the portfolio means OXB is at least a prolific generator of news, which ultimately drives share prices in this highly speculative sector.

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