The Investment Column: Cash in your chips as smokers abandon Rank

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The Independent Online

Our view: Sell

Current price: 109.75p

Rank Group took another battering yesterday, the shares continuing to slide as a result of last week's profit warning that was, well, rank.

Not only has the impact of the smoking ban been worse than feared at both its bingo clubs and casinos, but the loss of large numbers of £500 jackpot gaming machines ("section 21s") thanks to the Government has also hurt revenues very badly. These machines are enormously popular and the decision to cut the number allowed in bingo halls and casinos has hit Rank hard. Lower jackpot machines have failed to fill the gap – and that is no surprise. They simply do not pay out enough to get punters interested in playing.

Rank is trying to address the problem – adding new games and bringing onstream outside "smoking" shelters where it is hoped that people will be able to play outdoor bingo. But they will still be cold in the winter, and many smokers will stay at home and play online, where they can smoke to their heart's content.

Prior to yesterday's falls, Oriel Securities had Rank on 16.5 times the reduced level of earnings it is forecasting, having seen the 19 per cent fall in September's revenues. That looks very pricey and while the yield, at 4.8 per cent, is healthy, there are doubts about whether Rank will be able to sustain its dividend given its current circumstances. A cut will undoubtedly hurt the shares even more.

To be fair Rank's problems, on this occasion, are really not of its own making. It has taken a nasty kicking from a Government which appears happy for people to get into real trouble gambling online while making it tough for those operating casinos/bingo halls to keep the ordinary bingo fan happy. But that is no good for investors, and the rule of thumb is that things usually get worse before they get better after a profit warning. The only option, therefore, is to sell.

Travis Perkins

Our view: Hold

Current price: 1512p

The knock-on effect ofthe slowing housing market has been felt across the board, but the DIY and building supplies tradehas been feeling the pinch for what seems like an eternity. The building retail group Travis Perkins has been no exception, losing more than 25 per cent of its value in the past four months alone. However, yesterday's trading statement was far better than some investors had feared, so has the market been too harsh on Travis Perkins?

The answer is that it probably has been too harsh, given that yesterday's nine-month statement made very reassuring reading. Total group revenue was 11.3 per cent better than in the corresponding period of 2006, with trading proving especially resilient at the specialist merchant arm, where revenue was 14.1 per cent better.

Wickes, the DIY retail chain acquired in December 2004 for £950m, grew turnover by 5.7 per cent on a like-for-like basis, and has successfully increased its market share in line with the rest of the group. In all, Travis Perkins operates over 1,000 retail sites across the UK with no exposure to foreign markets. But sales growth has come at a price – margins have fallen as a result of price competition and market conditions are unlikely to improve any time soon.

The shares certainly look decent value at just over 9 times forecast 2008 earnings based on forecasts from Seymour Pierce, the house broker, an attractive discount to the rest of the sector. On the back of yesterday's statement there is clearly a case to be made for buying the shares.

But barring miracles there seems to be little hope of a catalyst to turn sentiment around in the sector, and there is likely to be more bad news to come from the housing sector on both sides of the Atlantic. It was not surprising to see the shares rebound on the back of yesterday's statement, but there was enough caution in it to hold some buyers back.

This is a solid retail business with experienced management, but the bigger economic picture remains bearish. Other sector players have fallen further, and should some confidence return Wolseley is likely to outperform Travis Perkins, in spite of the decent showing yesterday. On that basis the shares are a hold.

Antisoma

Our view: Hold

Current price: 32.25p

Cancer treatments are still the holy grail of the biotech industry – but thousands of companies are researching treatments for cancer, and very few of them actually make it to the market.

Antisoma has revealed phase II trial results for ASA404, its cancer treatment. Although the trials were only concerned with its effect on prostrate cancer, it is no wonder the market greeted the statements with little enthusiasm. The results showed a marginal improvement against competing prostrate treatments, but survival rates will not be made public until next year. Investors should not hold their breath – even if the Swiss pharmaceutical giant Novartis saw fit to partner Antisoma in the development of this drug it may prove to be insufficiently superior to current treatments to get approval.

But ATA404 has legs left in it. Antisoma is due a $25m upfront payment from Novartis when phase III patient recruitment starts in the first quarter of 2008. That payment is with regard to its efficacy in small cell lung cancer, where results have been much more encouraging.

Just over one third of its market capitalisation is cash, and the balance sheet means that Antisoma has enough capital to see it through to 2010. Investing in biotechnology was never anything if not high risk, and anyone coming this far with Antisoma should stick it out until more data is published. Hold.

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