Better not to bank on HSBC

Phytopharm remains a dog of an investment; Raise a glass to Greene King
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The Independent Online

HSBC, the global banking titan that has been renowned for its conservative, even staid approach, seems to get riskier and riskier. After this year's $14bn acquisition of Household, a US lender to customers with less than perfect credit histories, comes "Managing for Growth", the group's five-year plan to build up its investment banking operations and dramatically expand lending.

If anyone can successfully manage for growth, it is Sir John Bond, the group's erstwhile chairman, but HSBC's elevated share price gives him more than the benefit of the doubt. It fails to reflect the dilution of the group's traditional focus on emerging markets.

We served our readers ill in March when we suggested selling HSBC shares. They are up a storming 28 per cent since.

The doubts over Household have eased mainly because of the dramatic rebound in the US economy. Yesterday, HSBC said it was seeing early signs of improving credit quality, cost savings are coming through and there are plans to market Household loans to other US customers. But this is a deal that will be tested only when consumers start to draw in their horns, which may not happen until interest rates are going up. Investors ought to worry that a third of HSBC's lending is unsecured consumer credit, and the proportion is going up. Yesterday's trading update said that, in the third quarter, a reduction in lending margins has been more than made up for by further growth in consumer loans. Lending to the corporate sector remains subdued, it said.

Building up the investment bank will not be straightforward, either, and the new honcho at its head has to begin by firing hundreds of the wrong sort of investment bankers. That said, HSBC ought to be able to sell merger and acquisition services to companies to which it currently lends money.

The sheer scale of HSBC is impressive, the geographical diversity and financial strength reassuring, and its new found ambition laudible. The shares, though, trade on an expensive 19 times next year's earnings and the value of the dollar-denominated dividend (yielding just over 4 per cent) is falling with the US currency. Avoid.

Phytopharm remains a dog of an investment

People will start calling us "Fidopharm", jokes Richard Dixey, chief executive of the drug development group otherwise known as Phytopharm. Despite a lot of hype over the years, the company is only now ready to launch its first drugs - and they are both for dogs.

Disappointing, and something of a piece for the group. Its great hope from a year ago, an obesity pill developed from a rare African cactus, will also not now be turned into a drug any time soon. Instead it could be made into an appetite suppressing snack bar (Phytopharm is talking to two food groups) or perhaps even a treatment for fat cats and dogs.

Of course, getting any product on the market is an achievement in this sector, and Mr Dixey shows a welcome commitment to bringing the group to break even next year. A licensing deal in Japan is helping bankroll worldwide trials of a potentially exciting new treatment for Alzheimer's, Parkinson's and other dementias. This is now the flagship programme for the group, but it is still at a very early stage, and an 18-month "proof of concept" study only began yesterday.

Phytopharm fell 10 per cent to 212.5p on below par interims. We said "avoid" a year ago, but although they initially halved, the shares are now considerably higher and are a "sell".

Raise a glass to Greene King

You wouldn't think a pint of ale would be top of the drinks menu during a long, hot summer but Greene King says it enjoyed soaring sales of its famous brands, IPA, Abbot Ale and Old Speckled Hen. The 200-year-old group, which brews all its beer in Bury St Edmunds, Suffolk, is clearly spending its generous advertising budget wisely.

In its home region, its share of the ale market is rising sharply. Across the group, turnover from the brewing business was up 13 per cent in the six months to mid-October, a great performance in a declining ale market.

Greene King's pubs business is also doing well. It now manages 551 pubs, including around 130 Hungry Horse outlets, mainly in southern England, and also has 1,130 leased and tenanted pubs. Sales from managed pubs grew 3.8 per cent while the tenanted estate showed a 6.3 per cent gain in the period.

That all combined to help Greene King turn out a pre-tax profit of £38.6m in the six months to mid-October, up 10 per cent from the same period a year before. Along with its rivals, cost pressures - mainly from the increases in the minimum wage - remain and there is always the risk of an unexpected change in consumer spending patterns, but the outlook is good, with the strong trends continuing into the second half.

Greene King's strategy, simply put, is to get more people into its pubs and to sell more ale, and the management's attention to detail is achieving just that.

Analysts are looking for a profit of around £80m this year, giving earnings of around 78p a share and putting the stock on a forward multiple of 11 times. Worth supping.

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