Investment Column: Sportingbet is a gamble after Italian fiasco

Galiform; Sinclair Pharma
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The Independent Online

Our view: Sell

Share price: 56.25p (+1.25p)

There's nothing wrong with pulling the plug on an underperforming business, and in financial terms at least, Sportingbet's ignominious exit from Italy could be seen as a positive.

The operation managed to generate a pitiful £2m of net gaming revenue and lost £1.5m this year. Given that, it's perhaps no wonder the company is happily saying ciao to the business, even if the £7.1m exceptional loss it will have to report as a result does leave an ugly scar on the next set of numbers.

The company blames the failure of the business on product restrictions imposed by the Italian authorities, which reformed gambling regulation in a way that was not conducive to Sporting's model.

In effect, they called the market wrong, and the exit now raises some questions about Sporting's ability, as an offshore operator, to capitalise on and work within a liberalising, but still highly regulated, framework. Others may, after all, follow the Italian model, and to generate stable growth gambling companies really need to be prepared to accept the local restrictions in return for legal certainty in the territories in which they operate. Generally Sportingbet is doing ok, enjoying a good start to what is traditionally a quiet fourth quarter,. and unless the company settles its little problem with the US Department of Justice, things should be stable enough until October when full-year results are due to be reported.

Currently Sporting is priced at 10.4 times forecast full-year earnings. It is pretty good at bookmaking, but that is high enough given that it is an offshore operator with a high degree of regulatory risk whose earnings are not showing a great deal of growth. Collins Stewart notes that its top line has been flat for fully six quarters.

Given all this, those wanting exposure to the gambling industry should seek greener pastures. Sell.


Our view: Buy

Share price: 46.5p (+9p)

Investors in Galiform, the group behind Howden kitchens that are sold directly to small builders, got a boost yesterday as the group published its first-half trading update.

The shares leapt 24 per cent as the group said that while sales were continuing to fall, they were doing so at a reduced rate. If the trend continues, the group would consider opening new depots in the autumn, it said.

That is good news indeed for shareholders, who have suffered somewhat from the company being association with MFI, a legacy that now includes just a handful of property guarantees.

This is also why the group trades at a discount to its peers, says the group.

Notwithstanding yesterday's share price jump, the discount is still significant, according to analysts at Numis, who argued before yesterday's update that "at the current share price Galiform trades at a 20 per cent plus discount to the merchanting peers on price earnings and enterprise value to Ebitda metrics (adjusting for the MFI legacy), which in our view is clearly illogical".

We agree that the group is a better bet than that and would still buy the stock, in spite of yesterday's price increases. Buy.

Sinclair Pharma

Our view: Cautious hold

Share price: 23.25p (-2.5p)

Sinclair Pharma, the speciality dermatology and oral healthcare group, issued its full-year trading statement yesterday, saying that Ebitda is up, and thanks to its "decisive and proactive steps to restructure and streamline the business," costs have been reduced, while the depth of management expertise has been increased.

Sadly, what it also mentions is that revenues disappointed – 15 per cent below analysts' consensus, say the experts at Piper Jaffray – sending the shares down 9.6 per cent.

The group blames "wholesaler de-stocking in the face of the economic downturn" for the drop in revenue, adding that the first data for 2010 suggests that sales are now returning to previous trends. While that is undoubtedly good news, the market is clearly waiting for more evidence, and we would suggest that investors consider taking profits from the last six months, which have seen the stock jump by more than 80 per cent, at this stage.

True, the Piper Jaffray watchers point to the group's "strong product portfolio", but argue that investors should be underweight on the shares, adding that the sales execution is disappointing and that they are "cautious on the outlook for the stock".

The group argues that significant product launches this year should help the stock, and we would give Sinclair the benefit of the doubt, for now. Cautious hold.