The Investment Column: Brand loyalty questions mar Reckitt's attractions

WS Atkins; Formjet
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The Independent Online

Our view: Fairly priced

Share price: 2,723p (+68p)

No one can get excited about stain removers, dishwasher tablets and insect killers but we all need them from time to time, which is why the household products group Reckitt Benckiser spends millions developing them and then millions more telling us why they are better than the opposition.

Despite the slowdown, sales continue to grow, although future profitability could be hit by the rising cost of raw materials and packaging. Best known for Harpic lavatory cleaners and Vanish fabric treatments, the group delivered a 2 per cent rise to £292m in profits for the final quarter on the back of a 6 per cent increase in sales. Full-year profits came in at £905m, up 15 per cent.

Reckitt, like its arch rival Procter & Gamble, spends heavily on marketing its 18 leading brands, leaving enough firepower to promote its pipeline of new products. There were gains last year from sales of Nurofen, Strepsils and Clearasil, which it acquired from Boots for £1.9bn in 2006. Reckitt lost market share in dishwasher soap in countries where Procter & Gamble joined the fray.

Reckitt is anticipating what some consider as toppy sales growth of around 6-7 per cent in the current year but that could prove challenging, especially in Europe, which accounts for more than half of total sales, and where there are ominous signs of increasing competitive pressure and general consumer weakness.

A battery of new lines will be introduced, including a new and more effective version of Dettol, new toilet cleaners, Airwick fragrances and liquid sachets of Gaviscon indigestion relief.

While Reckitt remains a highly defensive stock, it is heavily exposed to trading down by hard-pressed shoppers. It will also have to stand up to the big supermarkets.

Dividends for the year went up 21 per cent and there is still enough in the kitty for a planned £300m share buy-back this year. The price has drifted back 10 per cent since the start of the year and is currently selling on 21 times expected earnings. Fairly priced.

WS Atkins

Our view: Buy

Share price: 1,084p (+31p)

WS Atkins, the country's largest engineering consultancy, has fingers in enough pies to withstand most shocks. So, despite its involvement with the ill-fated Metronet consortium which left it nursing a £120m write-off, its workload remains robust enough to shrug off the setback.

Projects on the go include road improvements, re-signalling and nuclear decommissioning, while it has a team of 300 working on the environmental impact assessments of the Olympics. The only blip is in its management consultancy division, which failed to benefit from structural changes and, according to yesterday's interim update, will not recover until the final quarter.

Two-thirds of Atkins' business is in the public sector – which takes in Network Rail and the utilities – with the balance in the private area. So far, at least there is no material sign of business from either side either being delayed or cancelled as a result of the credit crunch.

Rail has recovered strongly, with Atkins picking up a contract to carry out the re-signalling upgrade at Rugby and Nuneaton as part of Network Rail's West Coast main line upgrade. Its design division has won an order to design a refurbished Birmingham New Street station. The Middle East is buoyant, particul-arly in Abu Dhabi.

A strong cash generator with a sound balance sheet and healthy spread of customers, Atkins is expected to deliver full-year profits of £90m, leaving the shares on an earnings multiple of just over 16.6 which is not demanding. Buy.


Our view: Speculative punt

Share price: 1.5p (+0.25p)

Tesco, Dixons and Woolworths sell own-brand software supplied by the AIM-listed Formjet, which cleverly acquires the rights from the creators and then finds the customers. It is proving pretty successful.

The shares jumped 20 per cent yesterday after Marks & Spencer, which is expanding the number of computer areas in its stores, agreed to sell five titles from Formjet. Initially, they will go into 18 stores, but could be rolled out to 80.

The titles, costing bet-ween £9.50 and £69.50, include advice on taking a driving test with 300 simulation video clips, and ways to create professional looking greetings cards. The others offer anti-virus solutions and internet security. The software will be sold alongside laptops, PCs, printers and digital cameras.

Formjet will also provide support services to M&S customers. Formjet's existing software is marketed under the Panda Security and Ability Office brands. Loss making in 2006, it moved into the black in the final quarter of last year when sales will be roughly similar at £3.6m. That could move sharply higher this year if the new software range proves a hit in M&S stores.

The shares are strictly for punters at this stage but with such a blue-chip customer list, prospects can only improve.