Investment Column: Polished performance for Reckitt

Positive news keeps Stagecoach steady; Public sector still provides a solid base for Tribal
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The Independent Online

Stain removal and loo cleaning may be mundane activities to most, but Reckitt Benckiser, the household goods company behind brands such as Harpic, Vanish and Finish, is delivering spectacular results. Yesterday it gave its share price another polish, saying it had made a strong start to 2004.

The group yesterday reconfirmed its target of 5 per cent revenue growth for this year, coupled with double digit profit growth, after revealing that sales for the first quarter were up around 12 per cent. Profits for the first quarter were more than 20 per cent higher.

This growth is mainly down to the launch of two new products - Vanish Oxi Action for removing stains and Lysol Ready Brush for cleaning toilets. These have been selling well and coincided with its predictably strong seasonal sales of flu remedies in Britain and pest controls in the southern hemisphere.

The company has been increasing the amount it spends on marketing its 15 fastest-growing brands. Margins are still holding up well, through cost savings such as reducing the amount of plastic used in bottles and standardising packaging around the world. While rumours abound that Reckitt is set to bid for SSL International, the Durex manufacturer, Reckitt is by no means dependent on an acquisition. It throws off plenty of cash each year, and is in the process of returning £250m to shareholders. This will also prop up earnings.

At the end of last year, this column thought that 940p seemed a little high to buy in, on the view that the gloss of its 2003 results would wear off. That was clearly an overly cautious view, but the question remains as to whether, at 1,439p, there is any more growth in the shares still to come. On yesterday's figures, most analysts were upping their forecasts, and there seems little that will dent the shares in the short term.

Reckitt has consistently outperformed. Those that have stuck with the shares should hold on for another good year.

Positive news keeps Stagecoach steady

A chastened Stagecoach yesterday said that it is to return £250m to shareholders. That news, along with the announcement that full-year results will be ahead of City expectations saw the shares close up 8 per cent at 87.5p.

The bus and rail company's disastrous £1.2bn Coach USA acquisition in 1999 has put the company off trying to grow by buying businesses. Instead, we have a story that relies on organic growth. The group has some 16 per cent of the UK bus market and it has the South West Trains franchise, as well as 49 per cent of Virgin Rail. Stagecoach has a few remaining operations in America, but the rest of Coach USA has been sold off.

Other foreign operations have also been divested, including City Bus in Hong Kong, although there remains a presence in New Zealand.

The company said South West Trains' full-year profits would be "comfortably ahead" of last year's £38.2m. Virgin will report a profit in the second half, against previous expectations of a loss. Also net debt, at £100m, is significantly lower than market expectations.

All of this positive news, plus the current corporate view on acquisitions, means that the company can return £250m, probably through a special dividend worth 18.9p a share. Stagecoach will have to gear up to return the money so there are obviously some risks in that, especially to the company's ability to respond to unexpected events.

Stagecoach shares closed last night on a forward multiple of 14 times revised earning expectations, which seems about high enough. Hold.

Public sector still provides a solid base for Tribal

Since this column tipped Tribal Group in November, the company's reputation has taken a battering.

A February profits warning showed that it is not immune to the pitfalls of its chosen area of business: providing services to the public sector. The company then announced that it had ended talks on a £300m NHS contract. The deal would have provided a nationwide chain of treatment centres but Tribal withdrew from negotiations after the brief was changed.

However a trading update yesterday, ahead of full-year results, provided some reassurance. The company said it would meet the lower forecasts set in February, and there have been improvements elsewhere.

As Evolution Beeson Gregory, the broker, noted yesterday, what the market had feared was a "negative spiral developing" as has been the case with other acquisitive companies. That fear was laid to rest. In fact Tribal announced a small acquisition: a software business for an initial £2.7m.

Despite the risks and frustrations of dealing with the public sector, the state remains a very good bet as a source of revenues. The shares, at 229p, much cheaper than when recommended in November, remain a buy.