Investment Column: There's more to solid GSK than swine flu

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The Independent Online


Our view: Buy

Share price: 1,260.5p (+17.5p)

Ah-Choo! With experts warning of a revival in swine flu over the coming weeks, the sound of someone sneezing will have people heading for the hills again. But that sound will be like a cash register ringing for investors in GlaxoSmithKline, Europe's biggest pharmaceutical company.

The group has spent the best part of 20 years investing in its vaccine programme and now it is payback time, with GSK expected to rake in as much as £3bn in revenues as governments around the world scramble to make sure they have enough H1N1 vaccine to cover a major pandemic, should it materialise.

However the real value, say a number of analysts, is that while swine flu itself could be lucrative for GSK, it has also focused minds elsewhere. Several governments are now likely to keep stockpiles of vaccines against future threats, which will maintain a healthy revenue stream for specialists like GSK.

GSK's vaccines business makes up just part of its overall operations and while the group insists it has seen off the worst after a number of its drugs lost patent protection, industry watchers point out that growth may be muted, regardless of any financial gain provided by swine flu.

"The stock is trading on a price earnings ratio of 11.5 times 2010 forecast earnings, in line with the European sector. Growth is not going to be easy and will be fairly low quality in the short term," say analysts at Panmure Gordon. Nonetheless, Panmure still likes GSK and urges clients to back the stock, predicting it will reach 1,400p in the next 12 months, largely on the back of an attractive current dividend yield of 5.2 per cent.

Andrew Witty, GSK's chief executive, who is approaching his 18-month anniversary at the helm, has largely delivered on his promise of diversifying the group, moving away from big blockbuster drugs and instead concentrating on a mixed portfolio of operations. We think GSK is a solid investment, regardless of any gains it might enjoy from swine flu. Buy.


Our view: Hold

Share price: 48.5p (-0.75p)

YouGov, the market research group that specialises in political polling, ought to be the only sure winner of the next election. Its data is carried by numerous newspapers and broadcasters. Yet, the company remains cautious after it swung to a £700,00 loss in the year to July, down from a £4m profit. Nadhim Zahawi, its chief executive, blamed the credit crunch after expected growth from the financial sector collapsed. There was no dividend.

The company has responded to the chill, cutting costs by £2.5m and scaling back investment in non-core activities. It also pointed out that its new Omnibus product – which provides answers in 24 hours – is going great guns, as is its BrandIndex in the US. Analysts at Numis have backed the development of YouGov's global technology platform and the strong brand to see it winning larger mandates.

The shares have lost 41 per cent since the start of the year and, given the potential of YouGov's technology development and its global expansion, there should be some upside. At least there was no repetition of the major profit warning in the first quarter. The company expects the "current challenging economic conditions" to continue and, given the bump in shares following results, we're nervous. But hold on for better times.

Innovation Group

Our view: Hold

Share price: 13p (-0.25p)

Innovation Group, a software company that handles all sorts of tedious business processes, mainly for insurers, has seen its shares rally by almost 130 per cent since the beginning of this year, although they had hit a rather desperate trough. At around 13p, the stock has yet to climb back to the levels it traded at before the collapse of Lehman Brothers. But does it offer value now, or is it too late to pile in?

Bulls will highlight the company's net cash position, which, at more than £10m according to yesterday's trading update, is substantially ahead of market expectations. Adjusted pre-tax profits will be in line with forecasts. There is also the prospect of deal activity – two unsuccessful approaches have already been made.

To this, bears may retort that revenues have been hit by chilly economic winds with the company reminding investors that its US business process outsourcing activities have grown much more slowly than expected. A writedown is possible. While the first signs of an economic recovery may be in evidence, industry risks remain.

The truth is probably in the middle, but the stock trades on a relatively undemanding multiple of 12 times Investec's forecast earnings for 2011. So we say hold for now.