Never mind the supermarket price war, Tesco looks too cheap

Streets are paved with gold for Marshalls; Roche deal makes Antisoma a healthier flutter

The "new Supermarket Price War" headlines come round every year at this time. Tesco and Asda were at it again over the weekend. Tesco boasted £80m of price cuts, while Asda recommended customers wear hard hats, since "prices are falling throughout the store". Investors need not take this silliness too seriously.

The promotions are an annual attempt to get maxed-out customers to carry on spending after the festive binge, while still believing themselves to be fulfilling resolutions to rebuild their finances. Asda, owned by the US giant Wal-Mart, and Tesco have the scale and financial firepower to make these big discounts, and the City has long budgeted that they will do so. Safeway, J Sainsbury and other smaller rivals do not have the muscle and so are unlikely to respond. Nothing much changes.

Which, from an investment point of view, is good news for Tesco, the market leader in the UK. Its share price slide of 22 per cent was one of the injustices of last year, and the stock is well worth buying.

There are grounds for caution, but they have been overplayed. In particular, the risks of its dramatic overseas expansion have decreased now the Asian stores have broken decisively into profit.

The cash-and-shares deal to buy T&S Stores, which went unconditional yesterday, will burden Tesco with more than £150m in debt, but this is entirely manageable and positions Tesco to dominate the convenience store market, which is growing in importance as lifestyles change.

Now, the fear is Tesco's move to offer more electronic and household goods has made it a less defensive investment. It wants 6 per cent market share in these areas, and currently has 4 per cent, up from 1 per cent three years ago. That looks a touch risky given the possibility of a dip in consumer spending on luxuries. But while non-food sales in the UK will no doubt boost like-for-like sales growth when Tesco reports on the Christmas period next Tuesday, it is not the decisive factor in Tesco's success.

Its dominance of UK food retailing and its ability to deliver growth abroad more than justify its current stock market rating. On 14 times current-year forecasts, and yielding 3 per cent, it is too cheap.

Streets are paved with gold for Marshalls

Ken Livingstone is accustomed to exciting strong views in London, but perhaps not in a city as far flung as Halifax. But thanks to the Mayor's "Liveable London" dream, he has a ready supporter base in Marshalls, the country's largest maker of paving slabs.

The Halifax, Yorkshire-based group has done well from the Mayor's plans to de-car the capital. It is in charge of laying the concrete blocks that will turn Trafalgar Square from a nasty traffic island into a pedestrianised haven. The £1.4m contract awarded to the group last year is just one of a handful of Mr Livingstone's initiatives to make London, well, more liveable.

Happily for Christopher Burnett, Marshalls' chairman, Mr Livingstone is taking a lead from the rest of the Government when it comes to spending public money. The company expects to do well in 2003 from government plans to build more schools and hospitals.

In addition to paving slabs, Marshalls supplies the concrete, clay and natural stone landscape garden and patio products used by middle Englanders to beautify their homes.

In a trading update for the year just ended, the company said it expected operating profits to be comfortably ahead of 2001 and in line with market expectations (before charging reorganisation costs). Although sales were up by just 4 per cent at £342m, a programme to slash costs means margins were comfortably ahead.

Mr Burnett – who having turned the company around during his six-year tenure as chairman said yesterday he would leave at the end of the year – is confident that demand from homeowners and local authorities will hold up, regardless of external shocks.

HSBC expects £48.5m of pre-tax profit for 2002 and £52m for 2003. The shares, up 7p at 226p, have drifted in line with the market since summer. At a deserved premium to the sector, they remain a solid hold.

Roche deal makes Antisoma a healthier flutter

A big fat cheque arrived at the offices of Antisoma in Ealing, west London, yesterday. Roche, one of Europe's biggest pharmaceuticals groups, is paying the tiny biotech group £27m to gain exclusive rights to its portfolio of promising cancer drugs.

At a stroke, Antisoma has acquired a sugar daddy to pay for the expensive late-stage trials and marketing of drugs that might otherwise financially cripple the group. If investors do creep back to the biotech sector this year (and there are good reasons to suggest they may), Antisoma should give them fewer sleepless nights than a rival of a similar size.

Antisoma can look forward to a host of milestone payments that will be triggered when new products start human trials or existing trials reach successful conclusions. It also should get royalties of between 17 and 20 per cent from future sales, much more than would normally be expected from outlicensing its drugs at so early a stage in development.

The deal turns Antisoma into an offshoot of the Roche research and development machine, but it also retains plenty of upside for Antisoma shareholders. The company has strong links with academia that have now been proved to deliver attractive drug prospects, and it now has the cash to pursue more such opportunities.

Much depends on successful results from trials of its lead product, a treatment for ovarian cancer, and the stock, at 29.75p, will never be for widows or orphans. But the potential gains make it worth a flutter.