Investment Column: Top billing for Cineworld's strong shares
Persimmon; ProStrakan Group
Friday 08 January 2010
Our view: Buy
Share price: 164p (+0.5p)
The idea that cinemas boom during a downturn was proved right in 2009, with the annual box office gross takings in the UK breaking through £1bn for the first time. This has had Britain's largest cinema chains rubbing their hands together in glee, with the only listed group, Cineworld Group, publishing a bullish update yesterday.
Revenues last year were up almost a tenth, with the box office take soaring 14.6 per cent, and the profits expected to be in line with market expectations. This was driven by what the group called a "strong release schedule" and it picked out Slumdog Millionaire, The Twilight Saga: New Moon and Transformers: Revenge of the Fallen among the highlights. It added that the rise in interest from film fans for 3D, with Ice Age III the second highest grossing movie of the year, and also Avatar, had an additional favourable effect on admissions.
Cineworld's retail operation, which includes selling movie fans an array of crisps, fizzy drinks and ice cream, rose 7.6 per cent. The group said it more than made up for the decline in advertising revenue which made up the lion's share of the 28.7 per cent decline in "other income".
The stock is cash generative and the group believes the line-up for Hollywood in 2010 – crucial for the cinemas' cash registers to keep ringing – is strong. It includes the latest Harry Potter, Shrek 4 and Toy Story 3.
Analysts pointed out that the significant Blackstone stake was an overhang and other issues for the stock include the strong comparatives this year and people staying in on Saturday nights to watch shows like X Factor and Strictly Come Dancing. Cineworld said it hadn't seen these shows affect performance so far.
At a full year price to earnings ratio of 10.5 times the stock looks cheap and a yield of 6 per cent is an extra bonus. Cineworld looks worth a punt. Buy.
Our view: Hold
Share price: 500p (+31p)
Persimmon boosted sentiment across the house building sector yesterday. In a trading update ahead of its preliminary results in March, the group said forward sales into 2010 were up 40 per cent. The news on borrowings was also positive, with Persimmon saying that it had reduced debts from £1.2bn in April 2008, to around £270m at the end of December 2009.
That's the good news. The not so happy tidings are that while Persimmon is performing, mortgage availability remains constrained and the wider economy, though seemingly on the path to recovery, is fragile. Persimmon acknowledged the headwinds, but said it remains confident about the long term future of the housing market.
We agree – this country needs more houses, and Persimmon will play a part in building them. For now though, it is faced with an uncertain market, which, if it dips again, could wreak havoc on housing sector share prices.
The bulls will no doubt point to the momentum in house prices. The latest figures from the Halifax, for instance, showed an annual rise of 1.1 per cent in December, the first annual rise since early 2008.
As for the wider economy, GDP is widely expected to turn positive when the next set of quarterly figures is released later this month. Once again, we agree – there are clear signs of a recovery and we'd buy into any weakness in the stock. But given risks to the recent momentum in house prices – beyond the paucity of mortgages, we'd point out that they remain at historically record levels – and that economists continue to worry about the possibility of a double dip later in the year, we would say, hold for now. Hold.
Our view: Buy
Share price: 101p (+16p)
ProStrakan is a company on the up. The speciality pharmaceuticals group, which published its full year trading statement yesterday, says that after reporting annual revenue growth of 40 per cent, 2010 will be the company's first year of profitability.
One thing that hasn't been on the up of late (until yesterday) is ProStrakan's share price, which has fallen by close to a third in the past three months. Chief executive Wilson Totten blamed the falls on analysts giving too much weight to the disappointing performance of Sancuso, a treatment used to guard against the nasty affects of chemotherapy, in the US.
Mr Totten pointed to yesterday's rise of 18.8 per cent as evidence that there is a bigger picture. With the group expecting to have three new drugs approved in the US this year, and the overt confidence on profitability this year, we would have to agree.
Furthermore, the recent falls mean the share now trade on an undemanding 2.4 times forecast sales, a discount to the wider market. We reckon the current level represents a good opportunity to get into ProStrakan. Buy.
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