Reed worth holding on to amid hopes of second-half rebound

String of alerts leaves Bulmer looking flat; Now's the best time to tune into UBC Media

In an environment hyper-sensitive to any suggestion of accounting concerns, Reed Elsevier, the Anglo-Dutch publishing giant, was last week laid low by a single investor kicking up a fuss.

Pieter Lakeman, founder of the Foundation for the Investigation of Corporate Information (Sobi), a tiny Dutch shareholder activist group, accused the company in a court summons of fiddling the books in its treatment of goodwill. The shares immediately dropped to nine-month lows on the news.

According to Sobi, Reed's 2001 accounts must be restated as the figures were flattered by a decision to amortise goodwill over a maximum 40 years, rather than its previous policy of 20 years.

The sell-off did not last long – indeed the stock closed up last Thursday, the day the issue was raised. Investors have decided that this is a technicality, a non-cash item, and not akin to the accounting problems that have led to the recent corporate scandals.

Although goodwill does show through on the bottom line, it has no impact on the company's operating performance. Furthermore, Reed clearly laid out the change in the treatment of goodwill, which appears to comply with UK and Dutch accounting standards. There is no set way to deal with goodwill.

ABN Amro said: "The treatment of goodwill is so subjective that investors and analysts routinely strip it out of financials in order to provide clear analysis of a company's operating performance."

While the Sobi lawsuit and the issue of goodwill is an irritant (it will be heard in court later this month), it should not be a major drag on the share price.

The matter is a distraction from the fact Reed has been a relatively safe haven in media, a sector that has been decimated by a savage downturn in advertising over the past two years.

Reed has great positions in science, education, legal and business-to-business (B2B) publishing, having simplified its board structure and bought the US publisher Harcourt in 2001, in a turnaround orchestrated by Crispin Davis, the chief executive.

Analysts expect underlying earnings per share growth this year of nearly 10 per cent– that's pretty rare in a sector where many companies are still looking at top line contraction this year. The interim results are due next month.

While the recovery in B2B advertising remains uncertain, a fairly strong second-half rebound is forecast for the group. Ad sales account for just 15 per cent of Reed revenues. Reed rightly trades at a premium to the sector, closing down 5p at 579p. But, on a forward multiple of 20, upside is limited. Hold.

String of alerts leaves Bulmer looking flat

HP Bulmer, the cider maker, appears to be running flat after delivering three profit warnings in six months.

Bulmer's latest earnings alert came on Friday, one working day ahead of results (although it says this was a technicality, due to the accounting treatment of an exceptional item).

It many ways, the company's position in the market is enviable. With the Strongbow and Woodpecker brands, Bulmer has 60 per cent of the UK cider sector. However, not only is cider a low growth market, but with such a commanding position in this niche expansion is increasingly difficult.

Furthermore, beer and cider has come under serious assault from "ready-to-drink" offerings, such as Smirnoff Ice, which have been a storming success. That is what has hit Bulmer's international plans and caused it to scale back its overseas operations.

Yesterday the company reported a 26 per cent fall in pre-tax profits, before goodwill and exceptionals, to £21.1m, for the year ended 26 April.

The international business is unproven and will be volatile. The company's other diversification, the wholesaling of drinks through a distribution network to independent pubs, is lower margin business.

The City appears to believe that the company needs a strategic solution, such as an alliance/acquisition by a big brewer or food distributor. However, with the family owning half the company's equity, this is unlikely.

Bulmer shares closed unchanged at 307.5p yesterday. With the stock on a forward multiple of 11, investors should quench their thirst elsewhere.

Now's the best time to tune into UBC Media

UBC Media is a small company with a big bet on digital radio. Yesterday UBC announced that it had secured digital carriage in London for its Classic Gold "golden oldies" format. These stations, as well as their digital distribution, reach an analogue population of 21 million.

The company is also at the forefront of exploiting the digital radio airwaves for data – as an alternative to telecoms carriage.

The strategy is to leverage UBC's legacy businesses, a successful operation to produce audio content for others, to fund the capital-consuming digital ambitions. UBC is the largest external content supplier, for instance, to BBC radio.

Digital investment pushes the company into the red but, after a £5.4m fund-raising earlier this year, it should be funded through to profitability. Yesterday UBC reported turnover up 49 per cent to £9.2m, with gross profits 74 per cent better at £3.0m – the operating loss was £210,000.

UBC was being optimistic yesterday that the Government will launch a promotional campaign for digital radio. This seems unlikely. Nevertheless, digital radio is bound to take off in the next few years, leaving UBC a major beneficiary. It's worth buying the shares, up 1.75p at 26.75p, before the attractions of digital radio become apparent to all.