Centrica offers compelling value

Sell De La Rue before more bad news arrives; Breath deep and buy Profile Therapeutics

Bear raid, n, pre-meditated effort to talk down company share price by investors with financial interest in seeing shares fall, usu accompanied by spreading of rumours, esp of "accounting worries" or other issues of topical concern, common in nervous markets.

Centrica, the group which owns British Gas and the AA, tried to reassure the market yesterday that a flurry of recent bearish stories are "without foundation". It was a darkly comic statement. The sheer number of rumours meant it took the company many paragraphs to cross them all off. No, they are not doing a share placing. No, nobody has raised doubts over their accounting policies. No, it is not about to give up its push into the North American market. No, the Texan authorities' decision to postpone energy price rises will not have a material effect on profits.

And no, the company is not having any problems in its energy trading division, Accord, which accounted for 29 per cent of turnover and 3 per cent of operating profit last year. This has become a scary area of business after Enron's collapse and a string of official inquiries into energy trading. Duke Energy has become the latest to admit to inflating revenues by booking artificial trades. Centrica says it has less than £5m outstanding trades with Duke, and never risks more than £25m at a time in its energy trading division.

Finally, "the board confirms that it is confident that the company's track record of meeting market expectations will continue." So why, then, did Centrica's shares end down another 5.5p at 155.5p yesterday, despite the trashing of the bearish stories?

One reason: no one really wants exposure to energy trading at this sensitive time, no matter how prudent the company's policies. A second reason: the move into financial services, by extending the AA brand and through the Goldfish credit card, has made Centrica a riskier proposition than it once was, particularly with consumer confidence under threat. And three: there are only a few people outside Centrica who really believe it can meet its ambitious targets of having 10 million customers in North America by the end of next year, with half coming from organic growth. Recent acquisitions have taken the total above 4.5 million, but cross-selling of gas, electricity and financial services could prove very tough.

Longer-term, the running down of Centrica's in-house gas reserves in the North Sea will increase the risks from fluctuating wholesale energy prices, while environmental regulation may also begin to bite.

All this said, the company has more than enough cash to sustain its investment and still provide modest dividend growth. The stock is now so cheap (on 10 times this year's earnings) that it has become compelling value.

Sell De La Rue before more bad news arrives

If Tony Blair is looking for businesses to back his campaign to get the UK to adopt the euro, he would probably do well to pick up the phone to De La Rue, the largest commercial manufacturer of bank notes in the world.

The company has done very well out of the euro. In its last financial year, ending 31 March, the orders kept flowing in for crisp new euro notes and spanking new systems to sort and count the new currency.

Unfortunately for De La Rue, the first flush of the euro project is now over. What is more, the company warned late on Monday, banks across the Continent are still so busy bedding the new currency down, that they are not making any of their usual orders for IT or security equipment. The company said that, as a result of this ordering freeze, group profits will be significantly lower than expected in the next six months.

No surprise then that the shares collapsed 158.5p to end at 287.5p yesterday.

The company argues that it will stage a recovery in the second half of the financial year because its customers have assured it that they do still intend to place orders for its products, which range from cash sorting machines for bank clerks to cheque books.

Yet a near-complete recovery in the second half seems unrealistic, given that analysts estimate profits will slump by nearly 40 per cent in the first half. WestLB expects full-year profit to be down 19 per cent, to £70m.

The company has also not completed the root and branch reform programme it began in 1998 and the expectation is that further downsizing could require a write-off of some exceptional costs later this year.

Even after De La Rue's shares lost a third of their value yesterday, ending at 287.5p, they were still trading on 11 times the new forecast of current year earnings. That still seems too pricey, given further bad news could be on its way. Sell.

Breath deep and buy Profile Therapeutics

Fancy investing in a small, loss-making manufacturer of inhalers, which has been ploughing cash into new drug products in the hope of huge royalties years down the line? Thought not. Profile Therapeutics is about as unfashionable as it gets at the moment, but there is value in the company and brave-hearted investors should take a look.

There was another vote of confidence in its drug delivery technology yesterday. The "intelligent inhaler" ensures just the right dose of drug gets to the lungs by working out the patient's own breathing patterns. The run-of-the-mill puffer used by asthmatics is just not reliable enough for cystic fibrosis or emphysema sufferers.

Alpha, a division of Japan's Mitsubishi Pharma, has joined Pfizer and Schering-Plough on the list of big companies developing drugs to be delivered using the intelligent inhaler. Profile will get milestone payments worth up to about £3.5m.

Profile has plenty of cash to pay for development work on the intelligent inhaler, and the launch of the first drug product – an antibiotic – to go with it early next year. The proceeds from flotation in March 2000 are supplemented by a long-established cash generative business making nebulisers, which is growing sales in the US.

It will be 2004 before Profile is breaking even, and it may well be that long before interest in the small pharma sector picks up, but by then the strength and growth prospects of this company will be apparent. Buy.