Share buybacks help Rentokil's ratcatchers to clean up their image

BTG brainwave will take time to pay off; Volatile Character Group is no Christmas gift

The rat catching, toilet cleaning, security patrolling, plant watering goliath that is Rentokil Initial has been fully rehabilitated by the City.

Sir Clive Thompson, who is handing over day-to-day control of the business to a new chief executive, James Wilde, in the new year, was in bullish form yesterday. In what could be his last statement to the City in an executive role, he reported sales up 7.9 per cent in the first 10 months of the year, with profits moving ahead even more, up 9.5 per cent. That puts the group on course to meet market forecasts of £394m profit this year.

The improvement in margins is particularly pleasing, and it is the one area which consistently confounds the City. Analysts are often disbelieving of Sir Clive's insistence that it can improve profitability despite being the market leader in most of its markets and subject to fierce competitive pressures. The high margins, he says, come because it tries to focus on the top ends of the market, and because its service vans have to spend less time travelling between clients than rivals whose customers are fewer and further between. Also, it also comes because the business is run with something of an iron fist. Mr Wilde has just assumed control at the underperforming UK hygiene business, which puts paper towels in office loos; the previous management were "satisfied with ordinary results", says Sir Clive.

Mr Wilde promises to tweak the organisational structure of Rentokil next year, grouping the businesses more by sector than by geography. The move should help spread best practice more quickly through the company.

So everything is back on an even keel after a disappointing period around the Millennium and a big programme of disposals. The target is for 8-15 per cent profit growth per year.

While the group generates great quantities of cash, it is preferring to give this back to shareholders in the form of share buybacks rather than through the dividend, which yields a modest 2.5 per cent. The ongoing buyback programme should help underpin the share price, though the rating of 15 times current year earnings, 13 times next year, looks a little on the generous side and may moderate future gains. Hold.

BTG brainwave will take time to pay off

Big brains, the scientists at BTG, but can they actually turn a profit? The company, which searches for inventions and then tries to commercialise them, has lost 85 per cent of its value this year as investors worry that hundreds of millions of pounds of investment won't ever pay off.

And yesterday it looked as if the management may have lost its bottle, too. While still insisting BTG is playing a (very) long game, it announced plans to slash its costs and concentrate on a smaller number of technology areas.

Certainly it is unproven, and there is little yet to show for the £122m raised in a rights issue in October 2000. This column does not share the widespread scepticism, although widows and orphans are advised to put their savings elsewhere. The trouble is that BTG is a long-term investment in short-term markets.

Sure, it has suffered from the bursting of the tech bubble. Commercialising its technologies now means getting less money upfront from licences, if it can get a deal done at all. But it is also able to pick up new inventions on the cheap. The return on investment has certainly moved further out, but the net effect, over time, should not be detrimental. In the circumstances, a more judicial use of its £83m cash pile could help win over the sceptics.

The most bullish point on BTG is that one product, a surgery-free varicose veins treatment called Varisolve, is worth more than the market capitalisation on the company, even on very conservative assumptions. While some fear what it will cost to get this product to market by 2006, it is likely that it will be able to do a lucrative licensing deal with a healthcare company before any cash crunch.

Investors who want to buy this share are not going to be knocked over in the rush. Indeed, it drifted 8.25p lower to 105.75p yesterday. But it should reward patient gamblers.

Volatile Character Group is no Christmas gift

Character Group is a strange little company spread across three divisions: toys and games, giftware and digital products. Its merchandise ranges from glitter pens to digital cameras and from Ozzy Osbourne talking dolls to The Lord of the Rings tie-ins.

Its track record is volatile to say the least, with a vast stock overhang of Star Wars product a few years ago pulling the rug from under the shares. This year it has performed better, with a jump in October when the group said full-year profits would beat forecasts.

The business has cut costs and improved focus. The product line-up is stronger, with success enjoyed by the Ready Steady Cook range of children's cooking products, such as popcorn makers, which are based on the television show.

In July the digital division signed an exclusive worldwide licensing agreement to sell Polaroid cameras. And cheap digital cameras are on offer from the group's Cool-icam range with prices starting as low as £40. Whether these can achieve more than gimmick status is open to question, though.

The business has clearly had a good run, turning around £5m losses to £1.5m profits in the past year. At 47p, the shares are also not expensive, trading on a forward price-earnings multiple of nine, assuming current year profits of £2.5m. The momentum is evident at the moment, though this is a fashion-oriented sector where slip-ups are all too common.

Have a Merry Christmas elsewhere.