The Investment Column: GSK is wrong treatment for credit crunch ailment
Thursday 12 June 2008
Our view: Sell
Share price: 1053p (-11p)
By drug giant GlaxoSmithKline's own admission, this financial year will not be the shot in the arm that investors might have been hoping for as earnings will almost certainly be down (it announced job losses yesterday as part of plans to cut costs). With the stock falling from 1385p in January, existing investors will not be surprised.
A spokesman for the group says the answer is simple. GSK benefited from the race away from financial stocks at the height of the credit crunch, and that now things are levelling out, investors are wising up to the fact that pharmaceutical stocks are not the safe haven they once were, given patent challenges and the rise of generics groups. As such, the shares have gradually fallen back.
This analysis is partly sound. Analysts at Dresdner Kleinwort say that at a share price of 1065p, GSK trades at 10 times estimated 2009 earnings, which is fair value given a sector weighted average of 10.7 times. Moreover, Dresdner reckons that because of emerging market potential, the whole drugs industry is about 30 per cent undervalued. GSK has recently restructured its senior management, under new chief executive Andrew Witty, for a greater emerging markets push.
However, a spokesman for GSK says the stock's true level is between 1250p and 1300p, which is unrealistic. The industry will lose £2bn in the next five years as the "generics cliff" (as the industry calls it) approaches. GSK reckons it will face these challenges before its peers, particularly in the neuroscience and diabetes divisions. By the time everyone else is suffering, GSK will be better placed, so the argument goes.
That may be true, but the patent for its asthma blockbuster Advair expires in 2010, and so far there the company does not have a potential blockbuster in the offing, relying instead on a package of treatments.
Investors will not have a happy time with GSK in the short term. A recovery could take some time. Sell.
First Property Group
Our view: Buy
Share price: 22.25p (+1.25p)
Investors with shares in main market property groups, such as Barratt Homes, have not enjoyed this week at all: a graph of stock prices looks ever more like a downhill ski slope – of the black run variety.
Why then would those investors entertain looking at a smaller property firm such as First Property Group (FPG)? For one thing, the company announced soaring full-year numbers yesterday, with pre-tax profits up to £4.66m, an almost fourfold increase on £950,000 the year before.
FPG is a property fund management firm with £290m under management via three funds, and another £200m to invest over the next two years from a fourth fund. The group, which until 2004 invested in UK property, operates largely in central and eastern Europe, with 88 per cent of its business in Poland, where property yields are still very strong.
The market reacted strongly to yesterday's announcement, with the stock up nearly 6 per cent, although the chief executive, Ben Habib, concedes that Alternative Investment Market listed groups like FPG benefit largely on newsflow.
However, that is not to say that investors have missed the boat; far from it. The company has recently bought back shares – Mr Habib himself bought £80,000 worth in January – and with about £12m in cash on the balance sheet, another buyback is a distinct possibility.
The company's analysts at Arden say the stock is very cheap, despite today's growth. They say that "the shares stand on a forecast March 2009 PE of 9.2 times, but stripping out cash and the £2.9m held in trading properties, the PE on the trading business is just [about] 5 times." The experts say the estimates are conservative as they do not include the £200m that is to be invested from the fourth fund, nor any future fundraising.
Some buyers will no doubt suffer an allergic reaction when presented with a property stock. However, FPG is solid and worth a punt.
Our view: Buy
Share price: 8.125p (-0.25p)
The chief executive, Simon Coles, says he never wants to deal with mobile phone software again. That comes after UBC Media closed the music download service on its Cliq business. This leaves the group with a radio programme production arm and its commercial division, which Nasdaq-listed Global Traffic Network (GTN) is set to buy for £15m.
Given there is so much change at the company, Mr Coles has announced a strategic review, which some investors might like to see the back of before backing the stock. By Mr Coles' own admission, once the deal with GTN goes through, UBC will be a "microcap" production group.
However, for those looking for a speculative punt, the numbers are pretty good. Back in April the group said that full-year results would be in line with consensus, with revenue rising 17 per cent.
UBC already has £3.5m in cash on its balance sheet, and coupled with the £15m it is expected to raise from GTN, the cash position will be bigger than the group's market capitalisation. At present valuation that would render the production group, which is the biggest independent provider of programmes for BBC radio, as worthless. Clearly that is barmy, and the group deserves a re-rating. Buy.
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