It's still safer to leave Galen alone

Currency tide turning for miner Aquarius; Time to take profits at soapmaker PZ Cussons
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The Independent Online

One by one, the bears have been tamed. Sceptical fund managers and grizzly analysts have been beaten into admissions of defeat by the relentless rise of Galen's share price - and, to be fair, by the dramatic improvement in profits at the Northern Irish maker of hormone replacement therapies and contraceptive pills.

One by one, the bears have been tamed. Sceptical fund managers and grizzly analysts have been beaten into admissions of defeat by the relentless rise of Galen's share price - and, to be fair, by the dramatic improvement in profits at the Northern Irish maker of hormone replacement therapies and contraceptive pills.

The company beat forecasts again with quarterly figures to 31 December. Pre-tax profit was $49.0m, up from $15.2m, on sales which have doubled.

But the worry is that this is all driven by acquisitions. Galen buys products too small to be given attention by large drug groups, but which may thrive when given to its growing sales force. The company also places a lot of hope on developing "line extensions". For instance, Ovcon, a contraceptive pill, will be launched in a chewy mint version. It is difficult to guage the appetite for such a product, but it is unlikely to be huge.

The newly-acquired products are yet to show they can substantially grow under Galen, rather than simply swell the company's size. Prescription data shows continued declines, although Galen raised prices to compensate. Longer-term, HRT demand could be weakened by numerous health scares.

If it hadn't been for acquisitions, we would all be very worried about the disappointing sales of Femring, the first product Galen created in-house. It is a vaginal ring used to deliver HRT drugs, and early hopes for sales of $50m a year now look impossible to achieve.

Galen has taken a while to establish trust in the City, which long remembers a reputation for obfuscation and lack of detail in financial results. But we missed a trick by advising readers to shun the shares last summer. That trust has been accumulating, thanks to good results and innovative moves to keep generic copies of its drugs off the market. Even now, Galen shares are on an earnings multiple below the average for companies with a similar strategy, so abstinence could prove painful again. None the less, long-term investors remain safer out than in.

Currency tide turning for miner Aquarius

Aquarius Platinum has its headquarters in Australia and its mines in southern Africa and Zimbabwe; it sells its platinum and palladium in US dollars and lists its shares in London. Currency fluctuations are quite important to its financial performance.

The South African rand recovered in 2003 from political scares the year before, raising the relative cost of paying workers at the company's biggest mines. At the same time, the ailing US currency means that London shareholders are feeling less of the benefit from the sky-high platinum price, which is set in dollars. By way of compensation, the chaos in Zimbabwe has sent that currency lower, reducing costs at Aquarius's fastest growing mine.

Which takes us to the underlying business, three big southern African mines. Mimosa in Zimbabwe contributed profits of $9.9m in the second half of 2003, up from $2.4m. The useful life of South Africa's Kroondal, the most mature mine, has just been extended by eight years thanks to a deal between Aquarius and its partner. And Marikana, also in South Africa, has thrown up difficulties in getting metals from the ground in big quantities, but it should be ramping up fast by the end of the year.

So production growth is secure, and platinum, thanks to demand from catalytic converters used to cut vehicle emissions, should stay high for a couple more years, analysts expect.

Aquarius's share price discount to Lonmin cannot fully be justified by the fact that it is a smaller, riskier operation. At 355p, it is a buy.

Time to take profits at soapmaker PZ Cussons

If you slipped PZ Cussons into your shopping trolley when we tipped it last year you will have cleaned up by now. The company, formerly known as Paterson Zochonis, after its founders, is behind such iconic brands as Imperial Leather.

The company, set up by Messrs P and Z in 1884 from their base in Sierra Leone, dominates market stalls in villages across Africa and Asia with products such as Joy soap and Venus hair cream. Its empire spans countries as diverse as Poland, the United Arab Emirates and Indonesia. The strong performance from this emerging-markets business, which provides the bulk of its sales, helped the group sparkle.

In the half-year to 30 November, profit before tax rose 28 per cent to £27.3m. The group invests spare cash in the stock market, and its portfolio rose by almost a third over the period.

But there is a downside to having such a dominant emerging-markets position: many local currencies are pegged to the US dollar, which has recently resumed its freefall.

This was just one of the concerns raised in yesterday's statement, the others including operating problems in China, rising olive and palm oil prices, and dwindling market share in the UK, where the supermarket own-brands have raised their game. Both classes of PZ Cussons shares, tightly held by the founders' families, now look overvalued. Take profits.

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