Investment Column: Hefty valuation weighs on Imagination

Marston's; Cello
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The Independent Online

Our view: Hold

Share price: 430.8p (-31.8)

Imagination Technologies is a British-based company that designs chips for smartphones such Apple's wildly popular iPhone and tablets like the California-based tech-giant's iPad.

The chip designer released its interim management statement covering 1 November to 15 March yesterday. The group said its portfolio of chip designs targeting "key transitions" in existing markets and providing technology to emerging markets was driving its licensing business. Imagination added that it continues to build relationships with new partners in existing and new emerging markets.

The group has recently won a series of contracts for its chips from global electronics manufacturers, including Sony and Texas Instruments. Imagination specialises in the design of graphics chips and it said the worldwide embedded graphics market alone "has the potential to reach multibillion annual units over the next five years".

The update was low on numbers and heavy on jargon, but it said that given the active licensing pipeline and the strong growth in chip volume, the group remains on track for "good growth" in the current year. The group expects the volume of chips shipped in the second half to "comfortably exceed" the 107 million shipped in the first half and full-year volumes will beat 200 million "by some margin".

It added that in the medium term it is on course for "significant growth", as the smartphone and tablet markets continue to grow. The group said that "the exploitation of many of its key technologies is still at an early stage in many markets". Its digital radio arm is not faring so well. Imagination said Pure had been hit by "tighter economic conditions" this year, but hopes a range of new products and services will lift it out of the doldrums.

Smartphones and tablets is clearly the place to be. Yet, we have picked Arm as our preferred stock out of the semiconductors and, as Imagination trades on a valuation of 58 times forward earnings, according to Peel Hunt, we are not inclined to change our opinion just yet.

Marston's

Our view: Buy

Share price: 91.95p (-1.2p)

Marston's yesterday toasted more robust trading over the 23 weeks to 12 March. Impressively, the pub and brewing group said there had also been an acceleration in the managed pub division's like-for-like sales growth to 3 per cent over the past 7 weeks. The company – which has an estate of 2,150 tenanted, leased and managed pubs – has been one of the sector's best-performing businesses over the past three years, largely driven by its fast-growing food sales, a quality estate of pubs and a solid balance sheet that has enabled it to acquire attractive premises.

Yesterday, Marston's, which brews Banks's and Mansfield beers, said its managed division grew like-for-like sales by 2.4 per cent for the 23 weeks, with food up 4.7 per cent and drink sales higher by 1.5 per cent. Perhaps more importantly, it eked out a 0.1 per cent rise in like-for-like profits at its tenanted and leased pub division, compared with a fall of 4 per cent in 2010.

Marston's attributed this to its franchise-style contract designed to incentivise publicans, which has been rolled out to 190 pubs. That said, the group's shares have come under pressure over the past three months since hitting a 12-month high of 118p in December, largely due to fears over consumer spending. We don't expect Marston's shares to fizz over the next year but on a forward earning multiple of just 8.4 they may be worth a punt.

Cello

Our view: Buy

Share price: 54.5p (unchanged)

Cello offers its clients what it calls the "aha moment" that comes with a range of management consultancy services at any rate. It believes that "information is interesting, but knowledge is power. Ideas are valuable but only when turned into action".

Investors turned information into action on Tuesday as the shares plunged in the wake of its full year results. The stock was hit by a combination of wider falls in the market and the company's placing to support an acquisition. Despite the drop on results day, the numbers were robust and the company said the strong performance seen in the second half of the year had continued.

The deal to buy MedErgy HealthGroup, a healthcare communications consultancy, was also a positive step, and deserves support.

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