Stay tuned to Chrysalis

No need to chase RM; Care UK is looking a little healthier

Chrysalis may be a mini-media conglomerate, with operations in music publishing and TV production but the part that is really interesting are the radio assets, which include the Heart and Galaxy brands. The group only moved into radio eight years ago, and it is already the number four player, with a 10.1 per cent market share (after GWR, Capital and Emap).

The Chrysalis radio business is booming. While more mature rivals are seeing shrinking sales, due to downturn in the advertising cycle, like-for-like revenues at Chrysalis radio were up 12 per cent to £49.1m, for the year ended 31 August. And, the first quarter of the current year has seen radio sales an astonishing 17 per cent higher.

The reason is that its stations are young and growing, though, these rates of growth cannot go on forever.

Group pre-tax profit came in at £5.8m, compared with a loss of £16.8m last time when losses on internet interests took their toll.

The received wisdom used to be that Chrysalis will sell its radio assets into the upcoming wave of sector consolidation but its recent acquisition of the LBC station means that it is now expected to focus on radio. TV production and book publishing are likely to go. There are more obvious synergies for the music interests.

On a straight price-earnings ratio, Chrysalis is trading at a toppy multiple of over 40 times 2003 earnings but this drops to 30 times 2004. But to understand the rating, special factors should be taken into account.

A securitisation of the music catalogue valued it at £150m. If you add, say £70m for TV and books, that takes you to £220m – while the current market capitalisation of the group is £365m, valuing radio at just £145m. Taking the multiple of earnings paid for the LBC acquisition, Chrysalis' radio business is worth £285m. Sooner or later, these valuations will start to be reflected in the share price, up 5 per cent yesterday to 218.5p. Hold on.

No need to chase RM

A couple of years ago RM was one of the growth stocks in support services. As a supplier of educational software to schools it was riding high on the back of the Government's commitment to increasing the use of computers in UK education.

But in the past year it has all gone pear-shaped. There was a profits warning which resulted in a new chief executive, Tim Pearson, taking the helm. But while he has cut costs and tried to make the group react faster to opportunities there is another big cloud hanging over the company in the shape of the BBC.

The Beeb has pitched to supply educational content direct to schools for free. Given this accounts for 15 per cent of RM's turnover, this is a blow. The Government is not expected to rule on whether to allow the move to go ahead until early next year but RM's shares have already reacted and are now at a sorry-looking 84p compared with their 2000 high of £10.50.

RM is trying to sharpen up its act. It has taken an £8m exceptional charge to cover the cost of staff cuts and getting out of unwanted property leases. But even before exceptionals full-year profits plunged to £5m from the previous year's £16m. And schools are already cutting back on IT spending ahead of a decision on the BBC.

The business is looking to diversify into non-IT areas such as teacher supply and exam co-ordination but these are not core strengths. Assuming current year profits of £7.8m, the shares trade on a forward price-earnings ratio of 11. Not worth chasing.

Care UK is looking a little healthier

Care UK is a nursing and care home provider that ought to be benefiting from the Government's push towards increasing private-sector health funding and an ageing population. That its shares have suffered this year is due less to any trading fears and more to accounting worries.

Those were finally put to rest yesterday when the company announced that it would change the way it accounts for long-term contracts, taking any one-off investment or disposal gains straight to the bottom line rather than over the lifetime of the contract.

It is something investors had been pushing for and makes the business more transparent. The change resulted in a £3m charge to the accounts for the year to September, which without the charge would have seen profits rise 18 per cent to £7.8m. With the charge, profits were down slightly at £4.8m.

These changes aside the business continues to win new contracts. It has preferred bidder status for residential care homes in Hammersmith, Enfield and Croydon as well as community care deals in Hammersmith and Hackney.

Care UK is hoping to benefit from NHS moves to remove so-called "bedblockers" from hospitals and place them in lower-cost sites. With high occupancy and demand which should continue to grow, the shares – down 0.5p at 141.5p – should now start being nursed back to health. Attractive.