The Investment Column: Hold on to Alexon while buyout spree continues

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The Independent Online

With retailers back on private equity shopping lists, investors are frantically trying to fill their trolleys with the next likely candidate. Enter Alexon, a low- profile clothing group that is home to brands such as Dolcis shoes and Kaliko womenswear.

At first sight, the company looks to offer as much value as the clothes it sells: its shares trade at a discount to the retail sector and change hands at just 9.8 times per share for the year to next January.

It also has plenty of other attributes to tempt the likes of Apax and Permira. Because it operates so many concessions, it does not have to pump lots of cash into pricey store refits, making it a low capital business. Consequently it has a sound balance sheet. Trading could also be worse, given the sorts of sales declines reported recently by Next, for example.

That said, yesterday's full-year figures failed to cut much of a Dash (another of its womenswear brands). Profits slumped from £29m to £20m. Much of the fall was down to the collapse of Allders, the department store group. Alexon lost 118 concessions in the process and the incident highlighted the inherent risks of being a concessionaire.

Operating profit in its Alexon brands division, which also includes Eastex, Ann Harvey and Alex & Co, was £20.9m against £25.1m. To keep like-for-like sales flat it had to cede some gross margin.

Even where Alexon does own its own high street chains there was further bad news. Dolcis is in trouble, facing intense competition in the footwear market. Its underlying sales fell 6 per cent and profits of £3.6m turned into a £700,000 loss, including a £400,000 impairment charge. And an attempt to launch a new chain, Mandolin, was a flop with the brand " significantly underperforming" plans. Its menswear arm sunk to a £2.6m operating loss against a £2.2 profit the previous year, with the Envy high street chain a particular disappointment.

The shares rose 1.5p to 258.5p on relief that trading was not worse. With apologies because they are below the level at which we tipped them 18 months ago, now is no time to cut your loss. Hold.

Delta

Delta is not widely followed by City analysts. To blame is the company's complex holding company structure, the fact that all its operations are outside Europe - in Australia, the Asia Pacific and North America - and the non-existent overlap between is key operations.

But this state of affairs offers a great opportunity to investors. At yesterday's closing price of 122.25p, Delta is valued at £185m. Of this, £170m is accounted for by the group's cash pile. This figure will fall to £105m once Delta pays minority investors money they are due following recent disposals and after it settles a European Union fine for anti-competitive practices.

This leaves the group's ongoing operations - a steel galvanising business and a company that produces materials used in disposable batteries - valued at £80m. This is far too low. Yesterday's results from Delta showed that these operations made a profit of £20m in 2005, up from £15m in the previous year. This was despite rising raw material costs. Anyone buying into Delta shares today will be putting their cash into businesses trading at just 4 times earnings. That is very good going.

There are, naturally, risks. Although the group has a tiny pensions deficit, the overall size of the fund is a whopping £667m and provides a living for 22,000 retirees in the UK. Also, due to the diverse geographic spread of the company, it is more exposed than most to exchange rate changes. There is also a question mark over what plans the family of Edouard Stern has for the 26 per cent stake in the company it inherited following the death of the French financier last year. However, the stock's lowly rating more than makes up for these factors. Buy.

Neutec Pharma

Neutec Pharma has two drugs in the end stages of development and has spent just £17m getting them there during the course of the past 9 years. By the standards of the biotech industry, that is very good going. Mycograb is Neutec's most exciting product. The drug is close to getting approval from health regulators for the treatment of invasive candidiasis - a lethal thrush type infection - and for use in the fight against breast cancer.

Of the two markets, cancer is clearly the bigger one - producing drugs to fight the disease is a billion-pound business. But its use against thrush in women is also likely to generate serious profits for Neutec. Analysts expect it to be on the market for this purpose later this year and predict it could help the company notch up a pre-tax profit of £10m next year.

Separately, Aurograb, an anti-MRSA product, is nearing the end of Phase III trials with data on its performance expected in the coming months.

NeuTec shares have jumped 14 per cent since the start of the year and closed at 514.25p yesterday. Numis Securities expects various clinical, regulatory and licensing updates from the company to drive its shares towards the 900p level over the next 12 months. That forecast might prove to be over-bullish. However, one thing is certain - if all goes to plan at the biotech, then the stock will go a lot higher than yesterday's close.

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