Don't bank on Bradford & Bingley

Macro 4 needs more than just optimism; It could be worth getting aboard Ark
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The Independent Online

Bradford & Bingley might sound like a solid, sturdy lender full of good old-fashioned Northern caution. But the bank is battling to assuage investors' fears that it is a high-risk organisation coasting perilously along a cliff-edged housing market.

Bradford & Bingley might sound like a solid, sturdy lender full of good old-fashioned Northern caution. But the bank is battling to assuage investors' fears that it is a high-risk organisation coasting perilously along a cliff-edged housing market.

The traditional high street lender has long gone, replaced by a specialist mortgage provider that lends to wannabe landlords, self-certified borrowers who vouch for their own income, and DIY enthusiasts who go one step further than water features and build their own homes. Only 27 per cent of its loan book is left over from its building society days, and one in every two mortgages B&B now sells is a buy-to-let.

B&B's reward for this high-risk lending has been margins that are double those on bog- standard loans. Historically low interest rates have encouraged all and sundry to borrow, and B&B has racked up record volumes of lending. Balances were up 26 per cent at £26bn.

B&B insists its credit quality remains very sound, but there are reasons to be fearful. With interest rates creeping up, inexperienced landlords could easily become stretched. Slowing house prices might encourage more first-time buyers out of their dingy bedsits and on to the property ladder, driving down rental income. The fall in profits reported yesterday was mainly down to B&B's estate agency division, which failed to make money despite a booming market, and a poor performance by its army of independent financial advisers. Volatile stock markets have scared off savers and it will take time for confidence to return.

Some investors have been hanging on in the hope that B&B will be taken over. But this cannot be relied on, and broader lenders such as Alliance & Leicester might be higher up the sector shopping list.

While the dividend currently yields a nice 5.5 per cent, share buy-backs have already dried up and the pay-out may easily become too onerous. At around 10 times earnings, B&B is in line with its banking peers but its future earnings growth is not going to match up. There are safer, cheaper options out there with better potential. Avoid.

Macro 4 needs more than just optimism

Macro 4's spin doctor called to suggest we take a look at the tiny software company. After a year of reorganisation and cost cutting, he said, the group yesterday announced an encouraging set of interim results.

The business is two-pronged. Systems Management Products is boring but dependable, software programs which make IBM mainframe computers work better. This is the cash cow of the group, offering recurring revenues and a 30-year pedigree. Business Information Logistics (BIL) is the sexier part. Its programs allow big companies to manage and use documents more efficiently. This business operates in a multi-billion dollar burgeoning market and Macro 4 works with the likes of GlaxoSmithKline and Siemens. Although it is worth just £33m, the company punches above its weight in the City, with two brokers making forecasts.

It shares rose 4.5p to 170p yesterday because those "encouraging" results were peppered with optimistic noises about an upturn in IT spending, but in truth there was precious little sign of it in the numbers. Sales in the IBM business might recover later this year, now that IBM itself is selling some of the software, but there is still little visibility on BIL. A sales partnership with Xerox is helping drive sales growth on this side, but the IT spending recovery has to be broad-based and swift if Macro 4 is to justify its elevated share price.

Not tempting.

It could be worth getting aboard Ark

Ark Therapeutics failed to live up to its name in 2002: it didn't float. This time around, the biotech group looks like being the first in three years to prise open the sector's "funding window" and raise £55m with an initial public offering.

In the UK, the biotech sector is down there with mining exploration as a speculative investment. These are often tiny companies with no revenues, just talented scientists hoping to strike gold with a new life-saving or improving drug.

Ark is better than many. It has four products in or ready for the crucial last stage of human trials. It thinks it has hit a rich seam in vascular medicine (where it has developed a wound dressing in the shape of a boot that might one day be proven to improve leg ulcer healing times) and in cancer (where tentative trials show it may slow brain tumour growth by injecting the area with a genetically-modified virus).

The success of one of its gene therapy products could turn Ark profitable, but there are no such products available in the West and hiccups in this highly innovative programme would delay or even scupper launches optimistically slated for 2007. Sceptics argue that Ark's private equity backers are too eager to cash in and that they are pushing for a value that doesn't adequately reflect these risks. Its brokers appear to have pursuaded enough people, but private investors must remember they could lose the lot.

Where the shares go after flotation depends on sentiment towards the sector, but this is picking up in the US and Ark itself could buoy UK investor confidence if it is successful. On balance, it looks like there may be a buck or two to be made by snapping up the shares when they appear next month.

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