Imperial Tobacco looking high

Care UK; 365 Corporation
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The Independent Online

It isn't just Britain's smokers who benefited from the Chancellor's relative restraint in the last Budget, when he hiked the duty on packet of fags by only 6p. Shareholders in Imperial Tobacco are winners, too.

The modest tax rise was one of the reasons given for the resilient performance of the UK tobacco market. As a whole, sales declined by just 5 per cent, half the usual rate, as the demand for contraband cigarettes was reduced. At the same time, Imperial overtook Gallaher as the UK market leader, with brands such as Lambert & Butler, the top seller, Richmond, the fastest growing, and now Marlboro, which it is distributing on behalf of Philip Morris, the US tobacco giant.

Operating profit from the UK was steady at £325m, while pre-tax profits across the group continued to be driven by overseas growth. Imperial made £494m in the year ended 29 September, up from £450m.

It has yet to put a foot wrong despite making some great strides overseas. Acquisitions such as the recent Tobaccor buy, which took Imperial into Africa, have been made at the right price. Fingers crossed that continues. Gareth Davis, the chief executive, refused to rule out bidding for Reemtsma, the third largest cigarette firm in Germany, which is up for sale for an estimated £3.5bn – a whopping deal that would be fraught with danger.

There are also some worries over the Middle East, where growth was disappointing. Imperial said it was side-tracked with the Tobaccor deal and, in the wake of 11 September, it has also got cold feet on some product launches in the region.

Mainly, the empire is growing nicely, but the risks must be increasing now that Imperial shares are nudging all-time highs. Down 10.5p to 853p yesterday, they are vulnerable to a widespread shift out of defensive stocks as equity markets recover. On 11 times forward earnings, the shares are a hold.

Care UK

With Tony Blair proselytising the use of the private sector in the National Health Service, it is surprising that Care UK – which runs care homes for the elderly and the mentally ill – has supplied its shareholders with absolutely no earnings growth in the past year.

Annual results yesterday showed pre-tax profits flat at £6.6m despite a 20 per cent jump in turnover. Almost half a million pounds was unexpectedly knocked off the bottom line because of a new accounting policy forced on the group by its auditors only last Friday.

There were operational reasons for the poor performance, too. The company says two local health authorities reneged on promises to send patients to two new homes, leaving them virtually empty. It should have little problem filling them this financial year, though, and is in talks with new authorities. Less easy to solve is the shortage of skilled and unskilled staff at its new centres for people with special educational needs.

Margins are on the slide, partly because of the recruitment issue, partly because of a lower-margin management contract about to be signed with Surrey County Council, to run three-quarters of their residential care for the elderly.

But the cash keeps coming in from long-term contracts to run old people's homes and the company is sure to be a long-term winner from NHS reform. With a return to 15 per cent annual growth being forecast for the coming year, the shares sit on an undemanding price-earnings ratio of 16. Down 22.5p to 190p, they are good value.

365 Corporation

Remember the fanfare with which 365 Corp floated two years ago? With the DJ, Danny Baker, advising and the charismatic Dan Thompson in the chief exec role, 365 was able to raise £84m to fund a network of sports and lifestyle websites.

The dream died yesterday. Now Daniel-less and having blown most of the cash, the group put its last four sites into a joint venture with Chrysalis, the radio group, which also has an expensive foray into online fanzines it wants to offload. 365 put in a final £0.7m of operating cash – enough, it says, to get the venture through to profitability, assuming many of the 120 staff are laid off – and would like nothing better than to find a buyer. More likely, the venture will prove a final resting place for the websites.

One down, two problem areas still to go for 365. It has an underperforming unit providing a rag-bag of fixed-line and mobile phone services to small business, where competition is fierce and there needs to be more cost cuts. And even its cash cow, the 0898 numbers business, is in the red due to investment in a new "voice portal" which can make multi- choice phone services such as ticket booking less traumatic for the caller. It has started generating sales, including to Virgin Mobile but is still unproven.

The stock is a sorry distance from its 160p flotation and, up 1.5p to 9p, is unlikely to grow while the company is still shrinking. Avoid for now.