Premier Farnell is worth holding

Derwent Valley looks like hot property; IP2IPO could spell more bubble and trouble
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The Independent Online

There was "an audible gasp" when John Hirst, the chief executive of Premier Farnell, told a roomful of City analysts yesterday that the North American arm of his business is growing sales at 10 per cent-plus in the early weeks of 2004.

They're clearly an excitable bunch, the analysts who cover the electronic components sector. But that double digit growth is genuinely impressive. It should help assuage fears that Premier Farnell shares have come up too fast on hopes of a strong economic recovery.

When businesses need fuses, screwdrivers, semiconductors, engines and any other bits and pieces to keep their machines running, Premier Farnell - which has an astonishing 6 million different products in stock - delivers them overnight. It has little idea from one week to the next what the strength of orders will be and as such it is one of the purest plays on the economic cycle. We were too cautious on the global outlook to recommend the company's shares this time last year, and our readers have missed out on a 40 per cent rise in the share price since then.

The results Premier Farnell reported yesterday ought to represent the nadir of its fortunes. Profits before tax fell 9 per cent to £54.6m in 2003.

As well as the malaise in business activity and investment, the company also spent more than usual in 2003 on improving its computer systems and rebranding some of its divisions - actions which have already started paying off.

For this year, the aim is to bulk up the business in Asia, where it is currently too weak. A warehouse has been opened in China and the hope is that Premier Farnell can work more closely with its multinational clients to ensure it gets its product offering right. There is also work to do to turn round a UK distributor of industrial tools, where customer service standards have become so poor that clients are deserting.

The share price looks a little stretched on 22 times this year's earnings, but the 4 per cent dividend yield gives support. Hold.

Derwent Valley looks like hot property

Nice Company, Derwent Valley. The property group has long since sold the Yorkshire railway that gave it its name, and John Burns, who became managing director in 1987, has built up a distinctive business with assets concentrated in the West End of London and what he calls "the City borders" on the edge of the Square Mile.

Derwent is an "investor and refurbisher". It buys up down-at-heel properties where the tenants are on unattractive short leases, gives the place a revamp and gets in new long-term tenants, then sells on the property at a profit. It is a more attractive business model than that of many bigger property groups, who take a sedentary approach to development and prefer simply to harvest rents.

Needless to say, 2003 was not an easy year. With tenants proving harder to come by, especially around the City, rental income declined and the value of the company's assets tumbled 6.3 per cent. Yesterday's results, though, showed that things had improved rather than, as expected, continued to decline in the second half. Net asset value per share rose 1.5 per cent between June and December and Mr Burns said a pick-up in the West End was "close at hand".

Derwent attracted the interest of Winten, a Gibraltar-based investor, earlier this year but it was sent packing after offering 800p a share, compared with last night's 795p. Given the short-term recovery potential, the medium-term possibility of conversion to a tax-efficient investment trust, and the long-term strength of the business model, Derwent is worth considerably more. Buy.

IP2IPO could spell more bubble and trouble

Are we in the middle of another technology bubble? For bears making the case that we are, the valuation of IP2IPO, an intellectual property "incubator" spun out of Evolution Beeson Gregory, is Exhibit A.

IP2IPO is a veritable sweet shop of embryonic companies, more than a dozen in total, and it has first dibs on ideas from Oxford University's chemistry department, King's College London and the universities of York and Southampton. Most of its investments are in new life sciences ventures, but there are others in hi-tech, sexy areas such as nanotechnology. Inevitably, though, there will be more duds than triumphs in such an early stage portfolio.

The company raised £31.5m in the float last October and the shares, which were sold at 275p, peaked last month at more than 500p. At 454p yesterday, it is worth £185m. Yet it is impossible to get a grip on what IP2IPO might one day be worth to its shareholders. This month's flotation of one early-stage investee company, Offshore Hydrocarbon Mapping, raised £1m, which will cover IP2IPO's central expenses for the coming year. There may be more opportunistic flotations soon, but it is difficult to see returns justifying the company's market value for many, many years.

The only certain thing is that a public company is not the most tax efficient way to be investing in start up ventures. Avoid.

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