Time for Era to come out to play

City talk

TOYS and cameras retailer Era (6.5p) has been a penny stock for too long. While caution about the retail environment is justified, the shares have badly underperformed the sector this year. Yet Era is financially sound with cash in the bank, while net assets equate to 13p a share.

Everything depends on Christmas trading, so profits forecasts are at best tentative. But on Beeson Gregory's estimate of pounds 2m pre-tax, versus pounds 1.3m last year, a p/e multiple of less than seven falling to less than six in 1996 looks mean in the extreme. Buy.

THE Bundesbank's recent decision to cut rates caught many observers on the hop. They had been predicting a tighter monetary stance for some time, but the interest-rate cycle has surely turned, despite fears that a policy reversal could plunge the German economy into recession next year. Building materials group RMC (1,167p) should have a pretty good idea of how the land lies as more than half its profits are made in Germany.

Its warning that the German residential market will see some decline next year as the reunification building boom peters out was largely lost on a stock market enthralled by news of RMC's first rights issue in 29 years.

The cash call will buy in the minority shares of the German operations, reduce debt and enhance earnings in the first year. Tapping shareholders at this stage in the cycle could look well-timed 12 months on. In the meantime, the stock's premium rating to the sector has been fully restored so now looks a good time to take profits.

CLEAR indications are emerging that the top of the steel cycle is near, warns broker BZW. The recent pause in US economic growth has led to a 15 per cent fall in the price of US hot rolled coil from its January peak.

The widespread fear is that Europe will follow suite. While the effect on British Steel (188.5p) is not great at this stage, the small forecast fall in average hot rolled coil prices next year implies a pounds 50m cut in profits for 1996/97 and beyond.

Nevertheless, BZW reckons that the shares should be held, not least for the support provided by a prospective yield of 6.6 per cent. Moreover, the dividend is amply covered four times over by forecast earnings per share of 40p in the year to March 1996.

SUPPLYING the pharmaceuticals industry with folding cartons, labels and leaflets is arguably the most exciting - and most profitable - sector in the otherwise prosaic world of packaging. Demand for healthcare-related products in the UK rose by 8 per cent last year - a rate of growth that is likely to be sustained as the population gets older.

In addition, over-the-counter and other non-prescription medicines demand increasingly attractive packaging and presentation as they compete for retail shelf space.

The recent pounds 22m acquisition of PropharmaPak catapulted MY Holdings (64p) into clear leadership in UK pharmaceutical cartons, the largest market sector. The deal has prompted house broker Albert E Sharp to raise its forecast for the year to August 1995 to pounds 8.7m, implying a p/e ratio of less than 13, falling to below 12 in fiscal 1996. The majority stake held by South African industrial giant Malbak means the shares will always trade at a slight discount to its peers, which stand at 15. But the current gap looks excessive. Buy.

THERE is no denying that interim results from aerospace and power generation group Rolls-Royce (171p) were poor, but broker Charles Stanley insists the fundamental story remains convincing.

The downturn in the power business is blamed on cyclical factors which should reverse next year, while a forecast increase in airline spending should help aero engines.

Restructuring benefits, improvements in the company's market, especially civil spares, and the timely purchase of Allison, the US aerospace builder, should ensure earnings grow from 9.3p per share this year to 13p in 1996.

The broker thinks the recent dip in the share price is a typical market over-reaction and offers a buying opportunity.

NEWS of a strategic alliance with satellite and cable television programme supplier Flextech is good for Scottish TV's business but is a two-edged sword for shareholders, argues broker Bell Lawrie White.

The deal, which will see Flextech take a 20 per cent stake in the enlarged company, greatly enhances prospects for STV's programme-making business, increases its clout in the ITV network and improves prospects for growth by acquisition.

But earnings are not expected to be enhanced for at least two years, and STV (503p) itself is now much less vulnerable to takeover, leaving little scope for outperformance.