The Investment Column: Southern Cross has scope for more acquisitions

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The Independent Online

Our view: Buy

Share price: 540p (-3p)

Before shuffling off this mortal coil a significant chunk of the UK population will see out their days in residential care. Depressing thought that may seem, but at least there is an opportunity to generate some profits out of care homes before selling the house and spending the children's inheritance on making your last days on earth as comfortable as possible.

Southern Cross Healthcare is, in terms of bed numbers at least, the largest provider of residential care home services for the elderly and the physically disabled in the country. The market for residential care is growing fast but remains highly fragmented, meaning there should be plenty of scope for further growth and consolidation.

Following yesterday's news of two small acquisitions the group now provides more than 33,000 beds in 652 homes, making the company by some distance the largest independent bed provider in the UK. However, large though that number is, it represents only 7 per cent of the total. Most care providers are smaller unlisted and family-run companies, although rival healthcare groups like Bupa and Four Seasons also have a presence in the market.

Since coming to the market last July the shares have been among the top performers in the second-line stocks, having more than doubled in the past 11 months. Yesterday's interim results showed strong growth, with revenue up 17 per cent to £336.3m, margins up to 29.2 per cent and a first set of positive per share earnings and a debut dividend.

Although the shares are not cheap, trading on 29 times UBS's forecast 2007 full-year earnings, that number drops to 23 times 2008 forecasts. Those numbers should come down further as forecasts are upgraded on yesterday's numbers, and on that basis, the shares are still good value. Southern Cross should remain at the forefront of consolidation in the UK care market, and with population demographics firmly in its favour investors should keep buying.


Our view: Buy

Current price: 424p (+12.5p)

It may sound odd for such new technology but the satellite sector is enjoying something of a resurgence. A number of big-name mobile satellite-services providers such as Iridium and Globalstar have returned from the brink of collapse, while demand for satellite services has never been higher.

UK-based Inmarsat has launched two new geosynchronous satellites over recent years, with a third now also built and waiting for lift-off. These satellites orbit the earth, as opposed to legacy satellites that hold a constant atmospheric position, and are much cheaper to launch than rival low-earth orbiting satellites. Inmarsat's satellites cover 85 per cent of the earth's surface - "everything but the polar bears" according to the company.

First-quarter results were outstanding, with revenue up 16 per cent to $141m and pre-tax profit almost doubling to $38.3m, and analysts were drooling over the numbers. Revenue from its maritime business rose 13 per cent, and its BGAN land-based mobile broadband service also made progress after attracting nearly 10,000 subscribers.

Inmarsat remains confident that it can match market expectations for growth this year, although it cautioned that there is still a long way to go before it beats current forecasts. The company's valuation is in the stratosphere, but demand for satellite services should continue to rocket as more devices come on to the market. With the European Alphasat project also set to be awarded to either Inmarsat or Eurelsat shortly, the shares are worth a punt.

Futura Medical

Our view: Hold

Current price: 42.5p (-18p)

The sexual health specialist Futura Medical tanked yesterday after the drug giant GlaxoSmithKline dropped plans to develop its anti-impotence gel and Futura lost a third of its value.

Glaxo signed the deal last year to develop MED2002 as the first over-the-counter treatment for men with erectile dysfunction as an alternative to pills such as Viagra. The gel is based on glyceryl trinitrate, a drug that causes dilation of blood vessels, has been used for the treatment of angina for more than 40 years and is moving into Phase III trials.

Glaxo has pulled out due to changing priorities, but the market for life improvement drugs is vast, and the gel has great potential. The company already has a number of other potential licensees in mind.

Futura's most advanced project is a condom that enhances erections, CSD500. Licensed to Durex-maker SSL, it is due for launch later this year. Despite yesterday's bad news, most of the short-term disappointment is now in the price, and although the stock remains very high risk, Futura shares are worth holding on to.