Investment Column: Thornton's shares like box of chocolates
Alliance Pharma; SQS
Thursday 09 September 2010
Our view: Hold
Share price: 81.5p (-3.5p)
"Forget love," the old saying goes. "I'd rather fall in chocolate." The nation's appetite for choccy appears to be on the rise, yet one of the most recognisable sellers on the high street faces some big challenges to have investors licking their lips.
Revenues at Thorntons were flat in the year to 26 June at £216.4m in what the management branded a "difficult trading environment". Pre-tax profits fell 2.4 per cent to £6.1m, which was in line with analyst expectations, and the company blames the falls on one-offs including redundancy charges and impairments on several stores.
Thorntons recorded strong sales growth in both its Commercial arm and the Thorntons Direct internet business, adding that as the chocolate market grew 4 per cent to £3.6bn, Thorntons grew its market share one percentage point to 7 per cent.
The problem remains with the Own Stores business, where sales declined, particularly in the second half of the year. The board has acted quickly to overhaul the division's management and revamp the stores' image. They have also introduced a new range of chocolates and ice-cream stands to some shops. The periods that matter for Thorntons are – unsurprisingly – Easter, Valentine's Day and Christmas. The company said market conditions are tough but believes it is in a "strong" position, and is confident in the run-up to the winter festivities.
John Von Spreckelsen, executive chairman, remains in charge for the moment, with the finance director, Mark Robson, but he said the search for a replacement to the outgoing chief executive, Mike Davis, who announced plans to quit earlier this year, is close to a conclusion. Investec puts the price at 12 times estimated earnings in 2011, which looks fair. Yet uncertainty remains around the new boss, the success of the retail shake-up and the wider economic trends: like a box of chocolates, investors do not know what they are going to get. Hold
Our view: Buy
Share price: 37.75p (+1p)
Rarely are we able to say in this column, and especially so over the last few years, that a company's first-half profit jumped by 166 per cent.
Alliance Pharma, an Alternative Investment Market-listed company, makes its money by buying, marketing and distributing a large range of licensed prescription medicines. And, on the strengthen of yesterday's numbers, the strategy appears to be working. For investors wanting to back small-cap pharmaceuticals companies, picking the best one can be akin to a game of pinning the tail on the donkey. For every success like Alliance, 10 such groups often burn shareholders' cash without return.
As such, there must be a coherent argument to suggest that when one finds a good stock in the sector, one should stick with it. A share price jump of more than 100 per cent in the last 12 months, and a confident outlook statement from Alliance yesterday, should be enough to convince backers that the company is one of the industry's safe picks.
But of course, there is a cloud to every silver lining. The share price gains have left the group looking a little pricey on a 2011 forecast multiple of 12.2 times. The yield of 1.2 per cent is also unimpressive, although the company would rightly argue that it is rare to find similar groups making any payment at all. The numbers prove that Alliance is getting it right, and while the stock is expensive, it is one of the outstanding picks in the sector. Buy.
Our view: Buy
Share price: 179p (+2P)
SQS, the German software testing group, posted half-yearly results yesterday, with adjusted pre-tax profits declining to €2.4m, compared to €2.7m last year. The shares went the other way, however, as traders, spurred on by some positive broker comment, bought in. Why? Well, firstly, profitability was weighed down by increased costs associated with investment in new staff and in growing the managed services business. While they may have hurt the figures in the short term, these moves will eventually lead to higher profits, and thus drive better returns for investors in SQS.
Second, revenues swelled by a healthy 9.4 per cent and the company signed up 91 new clients over the six months to the end of June. The new business figures are particularly encouraging and augur well for future growth. Finally, the stock is far from expensive. On Altium's numbers, SQS trades on a multiple of 9.5 times forecast earnings for this year. That falls to 8 times 2011 earnings. The prospective yield, on the other hand, rises from 3.6 per cent for 2010 to 4.8 per cent by 2012. We say buy.
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