Cookson only for the gamblers

Sanctuary hits a high note for the long-term; CodaSciSys is a hidden gem in the software sector
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Cookson, the stricken electronics group, pulled off its rescue rights issue last year, but shareholders who took part were disappointed if they thought they'd be able to cash in after the hugely discounted share issue. More than £277m was raised at 25p a share, but the price has rarely been above that figure since. The rest of the market is yet to express any confidence that the financial sticking plaster can hold Cookson together in the long run.

Cookson, the stricken electronics group, pulled off its rescue rights issue last year, but shareholders who took part were disappointed if they thought they'd be able to cash in after the hugely discounted share issue. More than £277m was raised at 25p a share, but the price has rarely been above that figure since. The rest of the market is yet to express any confidence that the financial sticking plaster can hold Cookson together in the long run.

In the short run, things have improved. It sold another clutch of businesses yesterday, raising £50m. The banks are off its back, and debt at the end of 2002 was less than £400m, compared with the whopping £750m the year before. Cashflows have been stronger than the City expected, proving that efforts to squeeze more efficiencies from the group's sprawl of businesses are bearing some fruit.

Management showed itself willing to continue trimming costs, axeing another 200 jobs, mainly in the US, yesterday. That takes the total group cull to almost 4,000.

But even £400m is some burden for a company worth just £420m and on many estimates debt interest payments will still not be more than 3 times covered by cashflows next year.

The issue is when overcapacity in the electronics industry will be worked through. Though sales in this, Cookson's biggest business, have stopped declining, little evidence suggests an upturn yet.

The ceramics unit, whose products are used in steelmaking, has responded well to restructuring, with margins improving, but the smaller precious metals unit was weak thanks to disappointing sales of jewellery over Christmas.

We advised readers to turn down the rights issue, and are not minded to reverse our negative stance at this stage. True, because the electronics business is currently being run at break even, an upturn, when it comes, could provide a very sharp rebound in the profits – and so in the share price. It is only a matter of when, not if, the cycle turns, but Cookson has so little financial room for manoeuvre that any delay to recovery this year could put it back on the rack. This is a stock for hardened gamblers only.

Sanctuary hits a high note for the long-term

Dolly Parton, The Strokes, Iron Maiden and Alison Moyet might not sound obvious stablemates at a record company but they are all making sweet music for Sanctuary Group.

Run by Andy Taylor and Rod Smallwood, Sanctuary has carved out a lucrative niche developing what it calls "long-term heritage artists". These include Iron Maiden and The Pet Shop Boys, whose loyal fan bases make them low risk, high return investments.

Sanctuary also manages tours and merchandising and negotiates recording contracts and music publishing for its artists. All this spreads risk and maximises the available revenue opportunities.

Not that much of this has been reflected in the share price, which closed down 2.5p at 40.5p yesterday. This is largely due to the perceived problems of the wider music industry, which is beset by falling CD sales and piracy.

A glance at Sanctuary's results yesterday shows that it deserves better. Underlying profits in the year to September rose 25.6 per cent to £14.2m. The recorded music division, the source of all of EMI's woes, saw sales rise 26 per cent. Highlights included Alison Moyet's new album, Hometime, which has sold 100,000 copies in the UK and has won the star a Brits nomination. Also hitting high notes were The Strokes and the Libertines. Artist services, which includes tours and merchandising, saw profits leap from £1.9m to £3.4m, helped by a Pet Shop Boys tour and the Iron Maiden Rock In Rio DVD.

The bear case for Sanctuary is that an Iraq war could force the cancellation of rock tours, as happened after 11 September. The bull case is a proven business model with the added bonus of a possible Led Zeppelin tour later this year. This would lead to profit upgrades.

Assuming full-year profits of £16.6m the shares trade on a forward price-earnings multiple of 12. Good long-term value.

CodaSciSys is a hidden gem in the software sector

There are hidden gems in the software sector, and the excruciatingly named CodaSciSys is one of them. The company grew out of the European space programme in the Eighties and has technology that allows users to track satellites and decipher the information they send back. It has uses in predicting that rainstorm coming in from the Atlantic, or that enemy aircraft approaching troops on the battlefield. And the company has an unbroken record of profit growth stretching back more than a decade.

The group has spent £9m on SquareSum, an accounting software group, which will bolster the Coda side of the business, which supplies database software. SquareSum takes Coda into the small business arena, with award winning software that can be augmented with Coda's own technology.

A trading update yesterday promised results in line with market forecasts, confirming that the group is growing sales despite a recession in the software industry that looks like entering its third year. Coda's cash flow is strong, proving its accounting policies really are as conservative as it claims. If it adopted the stringent US policies that have stymied rivals, its profits would actually be higher. At 237.5p, on nine times 2003 earnings, the shares are a buy.

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