The Investment Column: Vectura offers a remedy for the recession
Tuesday 25 November 2008
Our view: Hold for now
Share price: 47p (+1.5p)
Biotech companies have never exactly been the darlings of the investor community, such is their propensity to burn cash, often with little to show for it in the end. There are biotech firms and biotech firms, however, and while some of the less stable groups can tarnish the industry, there are a number of success stories that investors would do well to consider.
One such outfit is the inhaled therapies company Vectura, which yesterday announced interim results showing a 17 per cent hike in gross profits. Pre-tax losses widened marginally, but the group puts that down to more research and development spending.
The crucial thing for investors considering a punt on the biotech sector, especially in these markets, is picking a group that actually makes money, something Vectura can claim by virtue of licensing deals it has with some of the world's pharmaceutical giants, including Novartis. With more products expected to move into the third and final stage of testing next year, investors can expect hefty revenue growth.
Several biotech companies have been hit in the downturn, but Vectura's shares are down just 16 per cent in the last three months. The chief executive, Chris Blackwell, none the less thinks the stock is "hugely undervalued", adding that the market is not ascribing any value to the company's pipeline of treatments.
The analysts are hopelessly divided on what level they think Vectura's shares will reach, but all would recommend that clients buy the stock. Watchers at Canaccord Adams say: "We continue to value Vectura using a sum-of-the-parts approach ... Our model yields our unchanged target price of 113p."
This is all very well, but the shares have not reached those heady heights since April 2006. There is no suggestion at this stage that investors are seeing Vectura as an overwhelming safe haven, and are largely avoiding the whole sector. Hold for now.
Our view: Buy
Share price: 179.5p (+10.5p)
There are some sectors that should, in theory, flourish in a downturn. One such industry is outsourcing, which was, after all, born in a previous recession as businesses desperately sought to slash costs.
Judging by Mitie's interim results, the hypothesis remains true, with the group that counts cleaning the House of Commons among its contracts posting a 12 per cent jump in pre-tax profits to £37.6m. Existing investors will also cheer the 17.9 per cent increase in the interim dividend.
In fact the outlook for the group looks rosy. In May, the order book stood at a healthy £4.4bn, with 57 per cent of next year's expected revenues already booked. Mitie has little debt and plenty of cash on the balance sheet. On the face of things, therefore, there can be few reasons why investors would not buy the shares.
The experts at Altium agree: "We believe Mitie is an excellent business with strong operational and management credentials, and with just 5 per cent market share in its chosen markets, Mitie has plenty of scope to grow at the expense of weaker and smaller rivals."
There are marginal concerns, such as the fact that with 60 per cent of its work coming from the private sector, clients could go bankrupt. Of course, if Mitie is seriously hit by that, many other investments will have long since failed. Buy.
Our view: Buy
Share price: 420.75p (+20.75p)
As people opt to save the pennies and spend more time at home during the recession, so SSL's products, Durex condoms, get used more often.
Investors will certainly agree that the company is performing, with the shares doing proportionately better in recent months than the rest of the FTSE 250. The company's stock has dropped by just 4 per cent in the last month.
SSL, which also owns the Scholl foot treatment brand, will announce its interim results today after telling the market yesterday that it is buying the Swiss condom brand Crest for SFr7m. The figures are likely to be encouraging after the group announced in October that sales for the six months to end of September were up 22 per cent to £320m.
While investors will be encouraged by the numbers, they will also be impressed that watchers at Evolution reckon the shares, trading at 16.9 times annualised 2008 earnings per share, are cheap against SSL's peer group. Buy.
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