Grin and bear Autonomy

Acambis is a healthier biotech; Mears maintains its advantages
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The Independent Online




Autonomy's market leading software is expert at sorting the data that pours into its customers' businesses through e-mails, phone calls and the Web. But what it can't do is tell, in the final analysis, what it all means. It's a bit like the economic data and anecdotal information that investors have been poring over. Everyone is trying to decide whether we are headed to hell-in-a-handcart or on some particularly windy road to global recovery and no one can claim to have worked out what it all means.

When there is recovery, and with it a resumption in business spending on IT, Autonomy shares are likely to prove a very lucrative investment. Until then (and the industry is predicting a third down year) they will continue to languish. New investors may prefer to miss the first fruits of the upturn than jump in too early.

Autonomy makes its money only from licences to use its software. That means it has the fixed cost of paying its software developers and any uplift in sales will go straight to the bottom line. Any downturn in sales also affects profits severely. Net profit last year, reported yesterday, fell 35 per cent to $6.1m (£3.7m) after sales dipped just 3 per cent.

Autonomy is still profitable and sitting on a cash cushion of $147m (£90m) which it uses to support the price through share buybacks. Yesterday's figures were disappointing because of a fall in royalties from other companies' software which uses Autonomy technology, but the future rests more on the politics of the Middle East than on these tiny financial hits and misses.

When we last wrote on Autonomy in July last year, we advised existing shareholders to hang on, despite the giant losses many had suffered since the tech bubble burst. These losses have widened further, but Autonomy is a business with a long-term future and the potential upside from an IT recovery will be substantial. For now, grin and bear it.

Acambis is a healthier biotech

The US government's decision to buy enough smallpox vaccine to inoculate the entire population against a bioterrorist attack has proved more than just a shot in the arm for Acambis. It has completely transformed the loss-making biotech into a profitable vaccines company with a very healthy future.

It won contracts totalling £500m for the US, plus other similar hush-hush deals with other governments. More will surely follow. And then there will be the long-term business replacing batches of smallpox vaccine past their sell-by dates. All this should generate more than enough cash to plough back into the company's other vaccines, including work on a jab against the deadly West Nile virus that has hit the US, and ensure the company is not a bust flush when the major smallpox shipments have been completed by 2005.

The company said yesterday that, having resolved a shortage of testing kits, shipments of smallpox vaccine to the US this year will be better than envisaged in its profit warning in November. The shares were off 5p at 237.5p.

The cash from smallpox gives Acambis's respected management the flexibility to build a sustainably profitable company and the stock is a core holding in UK biotech.

Mears maintains its advantages

Mears specialises in facilities management for local councils. In plain English this means it does maintenance contracts for council houses, handling everything from decorating the stairwells to mending leaking taps.

It is a solid business whose shares have suffered as a result of the de-rating of the support services sector. Mears pleased the market yesterday by saying full-year profits for 2002 should be ahead of expectations. It also said the current year has started well, with a strong order book worth £270m and improved margins.

Bob Holt, the chairman, was even moved to pronounce that the group was better placed to take advantage of market opportunities "than at any time in its history". What Mears has to play for is the 50 per cent of local councils who currently handle their own maintenance rather than contract it out. These contracts can be substantial. In February last year, Mears signed a 10-year deal worth £130m in with Richmond, south-west London.

With the shares up 1.75p at 69p, they trade on 11 times current year earnings. This is a 9 per cent discount to the sector, which looks unjustified for a cash generative group like this. Sector woes may act as a drag, but the stock should outperform its peers. Good value.

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