The Investment Column: SkyePharma's rollercoaster ride set to continue

Clinton Cards; Shieldtech
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The Independent Online

Our view: Cautious hold for now

Share price: 13p (+0.5p)

"SkyePharma is like an onion", says one analyst. "You peel away the layers and find nothing in the middle."

This is somewhat unfair to the pharmaceutical delivery group that has what most watchers describe as a potential asthma blockbuster, Flutiform, on its books. The company's chief executive, Frank Condella, reckons that the treatment could account for 10 per cent of the $10bn (£5bn) US market in just a few years time. Analysts at the firm's brokers, Piper Jaffray, are more conservative and say that it eventually expects sales to reach $500m in the US.

It has been something of a rollercoaster ride for SkyePharma over the last two years. The group is still recovering from what analysts describe as the group's previous mismanagement at the hands of the former board of directors, and some have not yet forgiven them.

But the management disagrees. They argue that they have delivered with Flutiform on track to be launched by 2010 and have an agreement with US pharmaceutical giant Abbot in place, whereby the Americans will have responsibility to get the drug licensed. While the group concedes that Flutiform, "is key to the success of the firm," even the sceptical analysts do not actually doubt that the drug will be a commercial success.

Perhaps a more pressing concern for investors is two convertible bonds that the firm has outstanding. Put options, which allow bond holders the choice of selling the debt back to the company, are due on £89m worth of convertibles in 2009 and 2010. The company is set to try and renegotiate these deals with investors before the put date.

According to one convertible bond specialist, the company is effectively left with two options to avoid the put: offer more cash to bond holders or increase the equity ratio. No doubt the bondholders will negotiate hard for more money, while an increase in the equity ratio could dramatically dilute the standing of existing stockholders.

Analysts pretty much ignored the results posted today, which showed a £23.7m pre-tax loss versus £19.3m the year before and are instead waiting on news about Flutiform.

Investors that fancy SkyePharma could do well if Flutiform performs as the group hopes, but there are major caveats. The firm's eggs are pretty much all in the Flutiform basket and wriggling out of those convertible put options may prove very tricky. Cautious hold for now.

Clinton Cards

Our view: Hold

Share price: 55.7p (+1.75p)

By lunchtime on Valentine's Day every year, the queue of forgetful people often stretches well beyond the front doors at any one of more than 1,000 Clinton Cards shops. And it is on days like these, especially with a rather sick UK retail sector, that companies like Clinton Cards are increasingly reliant.

The group sells greeting cards and low-cost gifts, achieving most of its profits during the Christmas period. And as with any other high street name, Clinton Cards is expecting a tough 2008 as people tighten their belts in anticipation of an economic downturn.

But it is not all bad for Clinton Cards. "We continue to believe Clinton's low-ticket event-driven category will outperform the retail sector into a consumer slowdown," say watchers at Numis. The thinking is pretty simple; everyone will continue to buy £2.50 birthday cards irrespective of how much they are feeling the pinch.

"It is, in truth, a top line defensive play," says another analyst, who recommends a buy, but agrees that short-term investing in any retail stock is like, "catching a falling knife."

True, if you do not want to invest in retail names, avoid Clinton Cards like the plague, but if you have to buy into the sector, the company is a solid bet. The firm is a stronger punt than most other retailers. In short, if shoppers continue to go shopping, for whatever reason, Clinton's sales will remain pretty constant, so the argument goes.

The firm announced results that analysts at Altium said were in line with expectations with first half pre-tax profits up 18 per cent. Hold.

Shieldtech

Our view: Buy

Share price: 18.75p (unchanged)

While most people view crime, war and terrorism as wholly bad things, those investing in Shieldtech might quietly disagree.

The company describes itself as a provider of equipment for the homeland security market. After launching on the AIM market last year the group says it already, "has a presence in Iraq and Afghanistan," and has agreement with a, "significant military force in the southern hemisphere".

The firm, which hopes to grow through acquisition, makes protection and detection equipment including armour and devices that can limit bomb damage. It counts the Ministry of Defence and several police forces among its clients.

From an investment perspective, the company is worth a good look at. Governments around the globe are spending more on the kind of kit that Shieldtech makes. The company is also set to push itself into the training market. Buy.

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