The Investment Column: Inchcape is going places with eastern Europe sales drive

Dechra; First Artist
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The Independent Online

Our view: Buy

Share price: 406.75p (+11.25p)

The motor dealer Inchcape is driving hard to establish itself in emerging countries. A fast-growing middle class has the cash to splash out on imported up-market brands such as BMW, Audi and Toyota/Lexus.

In Russia, where it bought an Audi and Peugeot dealership in St Petersburg last year and is moving close to a much larger acquisition, car ownership is low, discounting is unheard of, so margins are high – 6 per cent, compared with 2-3 per cent in the UK.

Inchcape's dash overseas is timely. The UK market is getting tougher by the day, with total sales up just 2.5 per cent last year, although Inchcape did better, and that was largely stimulated by manufacturers' cheap financing deals. In contrast, new car sales in places such as the Balkans, the Baltics and Poland are growing at 10 per cent or more.

But Inchcape, which sells and distributes cars, is not neglecting its own back yard. As part of its twin strategy of strengthening its position at home while expanding overseas, the group bought UK-based European Motor Holdings and restructured its product range to concentrate on more profitable premium brands.

The group delivered the goods for the sixth year running. Group profits rose by a better-than-expected 9.9 per cent to £235m. The UK chipped in £70m, up 52 per cent, while emerging markets nearly tripled profits to £29.6m. Overall sales increased a quarter to £6bn.

The group's exposure to the weakening UK car market has contributed to the 27 per cent decline in the share price over the past year. But as the international drive builds up, so the UK will soon take on much less significance. The shares are trading on a multiple of 10 times 2008 earnings. Buy.


Our view: Hold

Share price: 397p (+1p)

Owning a pet can be expensive, especially when it needs medical treatment. Even so, more people now have dogs, cats and horses than ever before.

Dechra Pharmaceuticals develops and markets a range of healthcare products for a market worth over £10bn and growing at 5-10 per cent a year.

First-half profits increased by a quarter to £7.4m, helped by the continuing success of its key product, Vetoryl, a treatment for Cushing's disease. There are high hopes that the drug will soon be cleared for launch in the US, the largest pet market in the world, along with another of its products, Felimazole.

Both divisions within Dechra performed strongly. Pharmaceuticals, which launches drugs and also licenses them to other parties, increased revenues 41 per cent and profits 45 per cent. Europe achieved good growth, while the operation in the US is now trading profitably.

Services, which distributes a range of veterinary products, grew at a more modest rate, with revenues up 9 per cent and profits 11 per cent. Even so, it remains an important cash generator, financing the research into new drugs.

The second half will benefit from a five-month contribution from VetXX, acquired for £61m, which markets animal veterinary and dietary products.

VetXX is an excellent fit. It sells into eight European countries where Dechra was not represented. The integration is still at an early stage, but a number of opportunities for launching Dechra drugs through its network have been identified.

Dechra is firing on all fronts. The home market is strong, further sales growth in Europe is likely following the acquisition, while approval for its key drugs in the US will provide a big sales boost. The shares have risen 26 per cent in a year and look up with events for the time being. Hold.

First Artist

Our view: Hold

Share price: 80p (+4p)

First Artist Corporation has undergone a complete re-spray over the past four years. Then it was a football agency, collecting fees for moving players between clubs. It was a nice little earner, but the transfer window effectively slammed the door on doing deals for a large part of the year, while closer scrutiny of the transfer market began attracting some unfortunate attention.

It isn't out of the business completely. In an unusually brisk January it handled 19 transfers, although few would have made headlines in the red tops.

The group is now a much more broadly based media, entertainments and events group, all performing pretty well. A trading update said the first half was in line with expectations as it moves into the traditionally stronger second half.

The theatre agency Dewynters, part of its media division, is promoting new West End show,s including the musical Gone with the Wind, a sponsorship agency is picking up new clients, while an events arm, which puts on conferences and exhibitions, is doing well, despite a slowdown in corporate spending.

First Artist is expected to make £3.6m for the year, leaving the shares on less than 5 times earnings, after slipping 15 per cent in the last three months. A fickle business in these uncertain times, but worth holding at current levels.