The Investment Column: Carpetright chief can ride out the retail slowdown
Arm Holdings; CeNes Pharma
Wednesday 06 February 2008
Our view: Tempting buy
Share price: 782p (-39.5p)
Phil Harris has witnessed more ups and downs in the marketplace than most retailers. So the head of the Carpetright chain is well-placed to judge the likely impact on his company of the present slowdown. The chances are he is getting ready for some rough weather.
Shares in the group he founded, then floated, and then attempted to take private again last year, fell sharply after sales in its UK and Ireland stores fell by a hefty 4 per cent in the third quarter to 26 January. This was worse than analysts had feared, and is an acceleration of the decline seen during the first half.
The picture was brighter elsewhere in the 650-strong chain. Sales were up 3.1 per cent in Belgium and Holland and 16 per cent in Poland, although it only has 10 stores.
Trading has been erratic – up in November, flat in December, and sharply down in the opening half of January. In recent weeks it picked up again.
A new distribution and carpet-cutting centre will open in April, but any gains from the expected improvements in efficiency will not show through until next year.
Lord Harris says the current year will finish in line with expectations, around £61.6m, but this will owe much to improvements driven by cost controls. Analysts seem certain to trim forecasts for 2009. Few anticipate anything other than marginal underlying growth.
Wobbly credit markets pulled the rug from under Lord Harris's attempt to take the group private late last year. He was offering 1250p, which now looks extraordinarily generous, considering the weakness in the market, which must have been apparent to such an experienced retailer. The price has fallen 37 per cent since tabling the offer.
If any trader is capable of riding out an economic storm, it is Lord Harris. On that basis, the shares, at just 12.3 times expected earnings, look tempting.
Our view: Hold
Share price: 94.25p (-23.75p)
Arm Holdings, the microchip designer and former dot.com star, was punished yesterday for a weaker-than-expected fourth quarter performance that strengthened the market's conviction that this year will be very tough. The company lost 20 per cent of its value, making it the heaviest faller in the FTSE 250.
Arm designs chips that power devices such as iPods, mobile phones, video game consoles, personal computers, cameras and set-top boxes – all products vulnerable to a consumer squeeze.
Arm collects royalties whenever a gadget containing one of its chips is sold by the likes of Sony, Ericsson and Toshiba. Since 1990 over 10 billion Arm microprocessors have been shipped to such heavyweight customers. The company has a strong order book, fuelled by the use of its technology in a growing number of digital devices. Its growth continues to outpace its competitors. There is no indication that customers are cancelling orders, but Arm is adopting a cautious approach to prospects, which, coupled with disappointing earnings, led to a sharp sell-off in the shares.
Final-quarter earnings fell from £11.5m to £9.4m, while revenue was 5 per cent lower at £64.3m, below forecasts, partly due to the weakening of the dollar against sterling.
Arm's intellectual property division, formerly known as Artisan, saw revenues fall as it restructured itself. The business designs components which go into computer chips.
For the year as a whole Arm produced revenue of £259m, up by 6 per cent, while profits grew 15 per cent to £86.7m. The company is guiding the market towards a similar sales rise this year, but over a longer three- to seven-year term expects a return to mid-teen growth which characterised its time as a stock market favourite.
Once worth £9bn, it has shrunk to £1bn. The shares sell on 17.5 times forecast earnings. Hold.
Our view: Sit tight
Share price: 52.5p (+20.5p)
The biotech tiddler CeNes Pharmaceuticals leapt on a bid approach yesterday.
The company has been developing a painkiller, M6G, which is about to enter trials in the US. The drug has fewer side-effects than morphine, so there could be strong demand if it is successful. But for some time CeNes has been looking for a partner to help fund the cost of those trials. It wants an up-front payment, along with future royalties. So far no one has come forward, and before yesterday's rise, the shares had fallen 80 per cent since last year.
The market has been losing patience with biotechs. They emerged in the mid-1990s hovering up millions of pounds of investors' money in the quest for miracle drugs. Few have been successful. Institutions have banged a few heads together and forced the merger of some players.
The 62 per cent jump in the price values CeNes at £11.3m. A big pharma willing to take a punt on M6G may have decided to buy the whole company rather than pay to enter into a partnership venture to develop one of its lead products.
Investors should sit tight.
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