Punch Taverns still steady on its feet despite knockabout year for shares

Ferraris stalls after surprise R&D costs; Icap investors should take profits
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The Independent Online

Punch Taverns hasn't had the easiest of times since entering the boxing ring that is the stock market in May last year. Its share price has had more ups and downs than negotiations for Mike Tyson's next ringside bout. But Britain's second-biggest pubs operator took a successful swipe at its critics yesterday with a strong rise in half-year profits and upbeat comments on current trading. The shares duly responded, jumping 16 per cent to 212.25p.

Giles Thorley, the chief executive, raised a toast to securitisation as he unveiled the group's 17 per cent increase in pre-tax profits.

Securitisation is a long word for a simple procedure. Because pubs generate so much cash, the group can promise to pay back bondholders with this secure cashflow. This means its bonds are seen as very low risk, and Punch is able to raise long-term debt finance at relatively low interest rates. The idea is that Punch is a much more stable financial proposition than any of its rivals.

Punch also appears a safe investment because it receives a set rental income from its publicans, making it less exposed to the effects of any drop in sales than some of its long-suffering rivals on the high street. Although it is possible that a prolonged economic downturn could affect their ability to pay up, Mr Thorley says Punch works with its tenants to make sure this won't happen.

Profit margins are rising across the board. This reflects Punch's new and improved supply contracts with the likes of Coors and Interbrew; a better sales mix thanks to the increasing popularity of trendy premium lagers over yesterday's old man's ales; and a jump in the amount of rent paid by its tenants. Income from fruit machines also soared – money that feeds straight through to the bottom line.

Overall, pre-tax profits for the 28 weeks to 1 March were £55.6m against £47.6m a year earlier, on turnover of £217.6m, up from £205m. Punch also declared its maiden interim dividend as a listed company. Mr Thorley hinted this initial 2.1p would comprise about one-third of the total payout this year which, at the current share price, would give Punch a dividend yield of 4 per cent.

The group is in the market for attractive parcels of new pubs and spent £92m on 218 properties during the period. It has bought a further 27 sites since March, including a package of 13 for £4m, which will complete at the end of April.

The stock does come with one significant health warning. About 60 per cent of the shares are still held by its original venture capitalist backers, whose future share sales will no doubt dampen the appreciation of the share price. But the stock looks cheap enough on a price-earnings multiple to rise from here. Buy.

Ferraris stalls after surprise R&D costs

Ferraris Group is not at the big red sportscar end of the stock market. In fact, after messy and disappointing figures from the medical devices company yesterday, it looks more like a Lada with the doors hanging off.

The company makes a vast range of medical products used in cardiology and lung complaints, from monitoring equipment used in drug trials to "puff meters" for asthmatics. The sales didn't quite add up to expectations yesterday, but that wasn't the half of it.

Ferraris has at last decided to take on the chin the cost of research and development, filing it as expenses right away instead of portraying it as an asset to be written off over time. The scale of the hit to profits, both in the figures for the six months to 28 February and over the next few years, surprised the market and sent its shares down 9 per cent to 104p.

The company is also spending £847,000 on consultancy fees, factory alterations and other "commercially sensitive" items related to one of its more important customers. This can't be capitalised under the new accounting policies, either, so it has to come off the bottom line. Interim profits fell a third to just £271,000 and debt rose to an uncomfortable £25.4m.

Our tip a year ago has turned out to be a big mistake, and Ferraris is going to take some rehabilitation. Until it has two or three sets of clean results – no exceptionals, no restatements, no trading disappointments – the shares are only likely to drift. Sell.

Icap investors should take profits

Michael Spencer, the City grandee who chairs Icap, is set to pull off his biggest deal since merging Garban and Intercapital to form the company in 1999. Already the world's largest inter-dealer broker, Icap will next week complete its £180m purchase of BrokerTec, a hi-tech brokerage currently owned by a consortium of the world's biggest investment banks, including Goldman Sachs, Merrill Lynch and CSFB.

Inter-dealer brokers bring together buyers and sellers of bonds, foreign exchange and the fiendishly complicated derivative products beloved of financial houses' trading desks. Icap has seen its profits balloon in the febrile markets of the past few years. Because economic and political instability has generated wildly differing views of likely movements in currencies and interest rates, Icap's customers have rushed to hedge against, or bet on, those movements. Only last month, analysts were prompted to hike forecasts for Icap's profits for the year ended 31 March.

Mr Spencer was forced to rejig the terms of the acquisition to assuage competition fears in the US, and its agreement with the Department of Justice was tied up overnight on Tuesday. Previously, BrokerTec's shareholders – who are also its biggest customers – had agreed to place minimum amounts of business with Icap, but these provisions have been loosened. This makes the deal slightly riskier, but it is likely the relationships built up already will endure and the banks will continue to be big customers for Icap.

BrokerTec brings Icap a much-needed respectable electronic trading platform and should boost earnings from 2005, but it is being paid for in shares and these are likely to overhang the market. With Icap shares at 975p after another burst of buying, investors should take profits.

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