iSoft merger could nurse Torex back to health

Public sector cheer for Balfour Beatty; Baggeridge builds bigger profits
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The Independent Online

There is a mini-revolution going on inside the National Health Service. The Government has rearranged the way hospitals buy information technology and ring-fenced new funds in order to do so. The hope is that new IT will help make appointment systems more efficient and speed up the computerisation of patient records. The division of the NHS into regions with a single IT service provider, a consortium chosen by tender, may all sound on the geeky side, but it could be the difference between success and failure for the Government's promise to deliver noticeable improvements to health services in this term of office.

Torex, one of a number of UK companies which supplies important software to hospitals and doctors in the UK, looks likely to be a loser in this process, so its mooted merger with iSoft is more important to Torex than it is for iSoft, which has developed much more innovative technology. Torex brings to the pairing a wider customer base and a sharper understanding of hospitals' current IT systems, but it has not spent successfully on new technology.

The biggest hurdle to the merger is the competition concern aroused by the combined company's 45 per cent share of the hospital software market. The corporate lawyers are hoping to convince the Office of Fair Trading that the new tendering process renders that 45 per cent figure an irrelevance, and that the merger will create a strong domestic champion able to compete against the overseas firms which are mainly leading the bidding consortia.

While the growth prospects for Torex as a standalone company look pedestrian compared with iSoft, its financials - as set out in yesterday's interim results - are for the time being robust. A 19 per cent increase in turnover and a 43 per cent rise in pre-tax profit are simply not to be sniffed at, and there were good contract wins in continental Europe. Torex's rating is still lowly enough (15 times likely full-year earnings at yesterday's share price of 633.5p) that it could attract another bidder to rival iSoft.

So the stock is worth holding, although new investors ought to prefer iSoft.

Public sector cheer for Balfour Beatty

Balfour Beatty saw its shares sold off last month when it emerged that its rail infrastructure division and some former employees are to face manslaughter charges over the 2000 Hatfield train accident. Yesterday's interim results showed that the sellers were being far too short-termist.

This is a company with annual revenues of £3.5bn and some 35,000 employees across the world. Pre-tax profits were up 6 per cent, before goodwill, to £51m, for the year ended 29 June. Due to a much lower tax charge this time, earnings per share were 29 per cent better at 8.1p. Balfour Beatty's confidence in the future was shown by an 11 per cent boost to the interim dividend.

Hatfield and its implications are not fundamental to the Balfour Beatty story. Mike Welton, chief executive, pointed out that, even if the company lost all UK rail work, it would not be a disaster. As it happens, despite the effective renationalisation of the rail network, the expertise of the likes of Balfour Beatty will still be needed.

By the end of June, the group's order book stood at £6.4bn, up by a third. That includes over £1.5bn of contracting work on the giant Public Private Partnership to manage and upgrade London Underground. There is plenty of public sector work around, with the UK government's massive commitment to enhance the infrastructure of our schools, hospitals and now even the road network.

On the negative side, the US market is weaker than last year and the company is waiting to recovery millions of dollars for work carried out on the Eastern seaboard - it has put in claims for the money, after these projects were altered. The group will also be putting in an extra £11m in pension contributions this year.

Balfour Beatty shares have rallied in the last few days and closed up a further 12p to 200p, putting the stock on forward multiple of 11. That seems high enough for now. Hold.

Baggeridge builds bigger profits

At the peak of the Lawson boom in the late Eighties, the UK used 4.7 billion bricks every year. But demand has slumped to 2.8 billion, now the commercial construction industry prefers steel and glass edifices and residential house building has only just bounced off historic lows.

The brick making industry was caught out with too much capacity when things began to slip in the Nineties, and things are only just back in balance. But back in balance is good news, and shareholders in Baggeridge Brick, the UK's No 4 brick-maker, are seeing their investment back at an eight-year high.

The Midlands-based company has a 9 per cent market share in the UK, behind CRH, Hanson and the unquoted Galileo Brick. Baggeridge said yesterday that its largest factory in Waresley, near Kidderminster, had defied the baking conditions to register its busiest ever week at the start of August, traditionally a quieter month when builders head off on holiday.

So, for the third time in a year, Stephen Rawlinson, analyst at the house broker Arbuthnot, has had to rip up his financial forecasts. Instead of £4.5m profit in the year ending 30 September, Mr Rawlinson now reckons Baggeridge will bring in £5.6m.

Prospects for next year are good too. Housebuilders are concentrating their efforts in Baggeridge's heartland now that house prices in the south are looking weak. There is also awareness of the need to boost house building because of demographic change and to create affordable homes for key workers. Brick prices look likely to rise.

On Arbuthnot's new forecasts for next year, Baggeridge shares (up 6p to 126.5p yesterday) trade on a little less than 13 times earnings. With scope for yet more upgrades, the stock is a buy.