THE INVESTMENT COLUMN
Wednesday 26 July 1995
The drugs group SmithKline Beecham is several years down a road about to be travelled by its rival, Glaxo Wellcome. Its main product, the Tagamet anti-ulcer treatment, came off-patent in May 1994, as Glaxo Wellcome's Zantac will in a couple of years. It is also now six years into the merger of the US SmithKline Beckman with the UK's Beecham, an integration process which Glaxo is just beginning with Wellcome.
Despite that, the picture is only now starting to clear at SmithKline. Half-year profits to June, reported yesterday, were up 82 per cent to pounds 1.17bn, inflated by a pounds 512m gain on the sale of the animal health business to Pfizer in January. But even the 15 per cent rise in trading profits to pounds 710m was complicated by two big acquisitions last year.
In May, SmithKline announced the $2.3bn purchase of Diversified Pharmaceutical Services, which bulk purchases drugs to help cut the soaring cost of health care in the US. Just three months later it splashed out $2.9bn for Sterling Winthrop, a non-prescription drugs operation.
Second-quarter figures showing pre-tax profits creeping ahead 3 per cent to pounds 298m were hit by the higher interest bill on the acquisitions. Trading profits in the main pharmaceuticals division advanced 10 per cent to pounds 239m, with much of the growth apparently coming from DPS.
Until next year, when full comparisons are available, it remains difficult to judge the worth of the strategy behind these acquisitions. But there are now signs that the outlook is better elsewhere. Sales of Tagamet were down 58 per cent at pounds 73m in the second quarter, but analysts believe it may now be over the worst of the competition with generic rivals. Meanwhile, the decline in the quarter was offset by a 43 per cent advance to pounds 248m in sales of new drugs such as Seroxat, an anti-depressant and Kytril, an anti-emetic for cancer patients.
Crucial to the outlook for SmithKline will be progress on a string of new compounds - from congestive heart failure treatments to an anti-asthma drug - which could take one to three years to come to market, depending on the US Food and Drug Administration.
Last year's pounds 580m provision for restructuring should help to keep the profits moving forward between now and then. NatWest's forecast of pounds 1.33bn for this year would put the shares, up 1p at 562p, on a forward multiple of 17. High enough.
Stagecoach still on the right track
Perth-based Stagecoach has led the pack in the rapid reconsolidation of the UK bus industry. The company has spent around pounds 91m on 11 acquisitions since it floated at 112p in April 1993, taking its market share to 12 per cent, after a 4 percentage point rise in the last year alone.
Thus far, the City has enjoyed the story, despite its bad experience of acquisition-led groups, and the shares, up 6p to 236p, are just below their all-time high. Figures for the year to April showing a 72 per cent pre-tax profits rise to pounds 32.6m were stronger than some analysts expected, but the real good news came from last year's impressive cash flow and further confidence on the outlook.
That encouraged many yesterday to upgrade profits forecasts to around pounds 44m for the current year.
Part of the optimism stems from the likelihood that strong cash generation will lead to a lower interest bill this year. That could be quite significant given that borrowings have soared from pounds 54.9m to pounds 119m over the past year, leaving gearing at a hefty 142 per cent in April.
But the secret of the Stagecoach success lies in its ability to manage its acquisitions. The first full year of purchases made in 1993-94 added pounds 5.24m to the latest profits, with a further pounds 8.02m from initial contributions from last year's acquisitions. Earnings enhancement should follow as margins in the latest additions - currently just over 7 per cent - are raised to the target level of 18 per cent, which the original businesses are close to achieving.
Stagecoach reckons its increased purchasing power alone can add a couple of percentage points to the bottom line. It is less clear why it is so successful at cutting staff costs, which represent 53 per cent of the total, given that employment guarantees are often among terms of the company's takeover of the many employee-owned bus companies that have emerged from deregulation.
But improving the performance of acquisitions already under its belt should assure growth for Stagecoach over the next two years. Beyond that, it may find a steeper hill to climb. Competition for UK acquisitions is getting more intense, as rival groups like FirstBus and National Express gain critical mass, and the regulatory authorities look like getting keener to curb any nascent cartel in the industry. Despite a forward rating of less than 12, the shares look fairly rated.
No fairy tale at Euro Disney
Euro Disney may have made its first profit since it opened three years ago, but the theme park group is right to dampen over-enthusiastic talk that a fairy tale is about to begin. Large numbers of investors have taken a pounding on this company and it remains a risky prospect.
The good news is that revenues from theme parks and hotels are up 17 per cent and that attendances have risen by more than a fifth following a 20 per cent cut in admission prices. Hotel occupancy and room rates are also on the increase.
All this contributed to profits of Fr170m in the three months to June, compared with a Fr546m loss in the same period last year. The company is now expecting to break even over the full year.
This has been achieved against an uncertain economic backdrop. Weak consumer spending and a strong French franc have made a trip to Euro Disney expensive for the foreign visitors who make up around 60 per cent of the park's total.
But there are still large rain clouds hovering ominously over Euro Disney's parade. It is still burdened with debts of more than Fr5bn. And it is enjoying a holiday from royalty payments owed to banks and the parent Walt Disney company lasting until 1997-98. When those payments start again the company will find the going tougher.
Competition is also growing. The Port Aventura theme park opened in Spain in May and another rival is scheduled to open in Dusseldorf next year. The shares rose 10 per cent to 232p yesterday, but they remain as risky as ever.
Turnover pounds P/Tax pounds EPS Dividend
Leslie Wise (I) 32.2m (26.8m) 1.5m (1.2m) 2.88p (2.38p) 1.75p (1.75p)
Lowe (Roert H) (I) 7.1m (5.8m) 678,000 (305,000) 0.78p (0.11p) - (-)
Menvier-Swain Group (F) 85.1m (70.3m) 11.1m (9.4m) 15.3p (12.9p) 3.5p (2.9p)
MITIE Group (F) 125.2m (101.7m) 4.6m (3.4m) 12.2p (8.5p) 1.7p (0.25p)
Ryland Group (F) 233.8m (183.2m) 3.2m (2m) 9.09p (7.81p) 2.35p (-)
Shandwick (I) 82.3m (78.7m) 3.2m (2.5m) 1.7p (1.5p) 0.43p (0.43p)
Stagecoach Holdings (F) 337.7m (190.8) 32.6m (18.9m) 16p (10.3p) 3.65p (2.45p)
St Modwen Properties (I) 13m (11m) 4.3m (4m) 2.5p (2.3p) 0.7p (0.5p)
Standard Platforms (I) 699,000 (750,000) -315,000 (-36,000) -1.5p (-0.9p) - (-)
Union (I) - (-) -792,000 (-793,000) -3p (-3.7p) 1.5p (1.5p)
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