The Investment Column: Exceedingly good reasons to be cautious about RHM

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The Independent Online

Share price: 280.5p (+5.5p)

Our view: Hold

Trading at RHM, the owner of the Mr Kipling, Sharwood's, Bisto and Hovis brands, has improved in the second half after a poor start to its life as a listed company. Profits are expected to come in for the year at £170m, but there are still few reasons to buy the shares despite yesterday's upbeat trading statement before final results, due in June.

For income seekers, a prospective 5.7 per cent dividend yield is attractive, but in a tough operating market it is hard to see sufficient growth to tempt anyone looking for more than a decent dividend. Once the current round of cost-cutting is complete, it is also unclear where more savings can be made in the medium term.

The company has more than £1bn of debt, soaking up about £43m a year in interest payments. Energy costs are surging and there is little reason to assume that the situation will improve markedly in the medium term, although the company does hedge 80 per cent of its energy requirements.

Mr Kipling may bake exceedingly good cakes but today's health-conscious consumers need a little more persuading to buy them. And with the bread market shrinking, maintaining top-line growth is going to be hard work. New products such as "Healthiest Ever Hovis" and "Invisible Crust Hovis" are doing well, but research and development spend will have to remain high if consumers are going to keep buying. Marketing and advertising spend will peak this year as Sharwood's and Hovis push for greater market share.

Although trading appears to be improving, there are not enough reasons to warrant recommending investors buy the shares. However, it is a highly cash generative business and the dividend is well covered, and with other food producers, especially Northern Foods, struggling, there may be some industry consolidation opportunities. Hold.

Phytopharm

Share price 49.25p (+1.75p)

Our view: Buy

The biotech firm Phytopharm, which has made headlines with its weight-loss extract from the African Hoodia cactus, got another boost yesterday when it launched its skin rash treatment for dogs in the UK.

Of Britain's 6 million dogs, 900,000 get eczema every year. While most dog owners are not going to take any action to relieve their canine friends, Phytopharm reckons that 10 per cent will seek treatment. So with the average treatment costing £100, the UK market is worth £9m a year, and the developed world perhaps £140m. The company has licensed the drug, Phytopica, a natural product based on three plants, to Schering-Plough. Under the terms of the deal, the companies are believed to share profits almost equally.

Phytopica is billed as a new treatment for canine dermatitis, designed to plug the gap between heavy treatments such as steroids and mild, less effective options such as shampoos.

Phytopharm's other big hope is an appetite suppressant extracted from the Hoodia cactus which the bushmen of southern Africa's Kalahari desert have been eating for thousands of years to stave off hunger during long hunting trips. The treatment is expected to be on the market in two years. Phytopharm has teamed up with the foods giant Unilever, which is paying the biotech firm up to £21m to develop the product. Phytopharm will get royalties on sales of all products containing the extract. With obesity becoming a major problem in Western countries, the potential for the treatment is huge.

The shares have suffered since a major setback in November when Phytopharm's Alzheimer's drug failed to show benefits in tests. It is still looking for a partner to fund bigger and longer clinical trials of Cogane, which is derived from a Chinese herbal remedy.

The share price may remain depressed until Phytopharm finds a partner but given its other exciting prospects, it is a buy.

Peter Hambro Mining

Share price: 1,535p (+45p)

Our view: Hold.

Peter Hambro Mining, the Russian gold group, is having a great time. The current record gold price is a wonderful backdrop, of course. Yesterday the company announced very encouraging results from its exploration programme. Although the company is seeing inflationary pressures, these are outweighed by the positive news.

It still has the lowest-cost goldmine in Russia, and yesterday said it was on course to treble production to hit 1 million ounces in 2009.

The company reported that geologists had discovered a new high-grade zone at its Pioneer mine, while analysis at its less-developed Yamal assets have established deposits in excess of 5 million ounces of gold.

To buy Peter Hambro shares, which have gone up 15 times over the past couple of years, you'd have to take the view that gold prices will continue to shoot up. For the less optimistic, the shares are a hold.

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