Alliance UniChem chief shrugs off deregulation

Exel delivers, but for how long?; Steam power keeps Spirax ticking

The market clearly doesn't believe Jeff Harris, chairman of Alliance UniChem, when he says that the tide of deregulation will not dampen profits at the UK's biggest owner of chemist's shops. The Office of Fair Trading wants supermarkets to be allowed to sell prescription drugs, and Alliance Unichem shares have tumbled as investors worry about a loss of market share.

Mr Harris sets out his case like this. 1) The Government is not likely to allow a free-for-all and will probably limit new pharmacy licences to those operators able to dispense advice as well as pills and potions. 2) Most patients are still going to get their prescriptions filled immediately at the nearest chemist to the doctor's surgery rather than waiting for their trip to Asda, and Alliance UniChem's strength is in such "community pharmacies". And 3) the new chemists allowed under deregulation will be potential customers for the group's wholesale operations.

It is never wise to underestimate the disruptive effect of a supermarket giant moving into your market, but Alliance UniChem's shares are already pricing in much worse than the chairman's benign view. At 382p yesterday, they now trade on 9 times CSFB's forecasts of earnings for 2003, which itself is set to be a year of double-digit percentage growth.

European governments are all pressing for lower drug prices, some more aggressively than others. The Italian market, where two 5 per cent price cuts have been ordered by Rome, is a particular black spot for Alliance UniChem, and it is set to cut costs there. But the group is still making a decent margin and has the financial strength to pursue its ambitious policy of joint ventures and acquisitions in new countries such as Germany, which will spur future growth.

We advised holding the shares a year ago, and the price fall since then has improved our confidence in long-term returns. Buy.

Exel delivers, but for how long?

Exel, the logistics group, is still delivering. Earnings grew in 2002 against a backdrop of uncertain trading times for many companies in its main markets, the US and UK.

The company saw profits before tax, excluding the credit from the surplus (yes, a surplus) in its pension fund, rise to £169.3m. This was 11 per cent rise over the year, as more firms used Exel for transporting their goods across continents, with much demand for air transit from Asia to North America.

It is keen, however, to move away from freight management, bog standard "Postman Pat" deliveries, into what it calls "contract logistics". This involves managing the comings and goings of all a company's bits and pieces from wherever they are produced – and it has higher margins. Yet this business shows little sign of really taking off while Exel's automotive and technology clients around the world hold back from major production spending. The company yesterday could only promise good progress if there was "no material worsening" in the economic climate.

While strong results from a company after a troubling year is undoubtedly a good sign, at 537.5p, its shares are still trading at between 12 and 14 times its earnings forecasts for 2003, which means it is not terribly cheap. Because of its exposure to the UK and US markets at a time when both of those economies seem to be sliding back, the stock is best avoided.

Steam power keeps Spirax ticking

The engineering company Spirax-Sarco has found a nice little niche in which it looks able to prosper despite the tough economic environment.

The group provides services and parts for steam heating systems in factories and makes "peristaltic pumps" – gadgets that allow abrasive or corrosive fluids to be pumped safely and without contamination. These are used by pharmaceuticals companies, among others.

Pre-tax profits came in at £40.7m for 2002, up from £38m a year before. Reported sales were up 2 per cent but would have been 4 per cent if the foreign exchange markets had not moved against the company last year. This is the major risk for now. More than three-quarters of the group's profits are earned outside the UK, and the weaker dollar could continue to dampen profits as reported in sterling.

Analysts reckon Spirax is fairly well insulated from economic storms because most industries – indeed, most factories – rely on steam in one way or another.

Spirax said yesterday it had made a firm start to 2003 and analysts upped their profit forecasts slightly to £42m this year. That translates to earnings of about 37p and puts the shares, up 3.5 per cent at 383p yesterday, on a forward rating of 10 times. Hold.