Too much is riding on new Safeway stores

Buy into Luminar while the shares are still cheap; CeNeS Pharma worth a gamble

Safeway has hitched its future to a giant programme of store refits and redesigns. The project has held back profits and is holding back sales, but Carlos Criado-Perez, the ebullient chief executive, insists New Safeway will be the best grocery shopping experience in the UK. The early evidence is that it will do little for Safeway's bottom line.

That was the depressing, if tentative, conclusion from yesterday's annual results. Mr Criado-Perez has worked wonders with Old Safeway, and was right to trumpet underlying profit growth of 17 per cent in the year to March when the £34m spent on refits is stripped out. This reflects the strategy of enticing customers through the doors with extra-low special offers that disguised slightly higher-than-average prices on other goods. But there has been a fair wind behind Safeway as the benign economic conditions allowed a good measure of price inflation.

From now the comparisons get much harder and the trend in price inflation is firmly in the other direction. Safeway has modest pockets compared to Tesco, Sainsburys and Wal-Mart's Asda, so it could get trounced in a new price war.

Everything hangs on the success of the redesigns, which are being sped up. The disruption caused by in-store building work was the reason given for the very disappointing 2 per cent sales growth seen in the six weeks since 30 March. Mr Criado-Perez says the point at which the gains from the new-look stores, with their focus on high-margin fresh food and prepared meals, will outweigh the pain of disruption is just weeks away. New stores enjoy a typical sales uplift of 10 per cent.

The trouble is these new stores require more staff to run, and their improved profitability is untested. The City was worried by a line in the results which said the "priority now is to fine-tune staffing levels". The shares tumbled 3 per cent to 308p as the City trimmed its expectations. In a sluggish grocery market that could be the start of a trend.

On 12 times this year's earnings, compared to a sector average of 15, the shares are not obviously expensive, and the prospect of a bid from Carrefour or Wal-Mart could underpin them at levels much lower than this. But the momentum is not with them, and they should be avoided.

Buy into Luminar while the shares are still cheap

Stephen Thomas, the chief executive of Luminar, is lord of the dance when it comes to the nightclub market. His bars and clubs group has a reputation for chart-topping results and yesterday's full-year figures were no exception.

Mr Thomas describes the business as "boy meets girl stuff", offering clubbers and drinkers "what they want, where they want and how they want it". This boils down to eight snappy concepts spanning the retro Chicago Rock Café to Life, a bar with a moving wall that turns into a nightclub on demand.

The group is full of ideas to breed customer loyalty, from membership cards to CDs.

Luminar proved that it had seen off the threat from longer pub opening hours, now that it has become easier for pubs to get late licences. It strengthened its operating margin by nearly 1 per cent to 23.4 per cent in the year to 3 March. A 58 per cent rise in pre-goodwill profit (to £69.6m) on turnover up 50 per cent (to £360.4m) reflected the success of buying Northern Leisure in 2000.

Luminar sees scope to at least double its 300-strong estate by 2007 and has pledged to grow earnings by 15 per cent for the next three years. This will be done through organic growth, which can be funded from internal cash flow.

The market took heart from this and the shares climbed 32p to 919.5p. They trade on a price-earnings ratio of about 13 times, which is cheap for the sector, and a re-rating is long overdue. Buy.

CeNeS Pharma worth a gamble

Few biotech groups go without the prefix "cash-strapped". CeNeS Pharmaceuticals, the painkiller specialist, is notorious for being "cash-starved", since it failed to raise money last year and has only averted bankruptcy by mothballing all its internal research programmes and slashing costs.

So what now? The shares have been moribund for eight months but it might just be time to take a punt. The restructuring is, in effect, done, and the company is no longer the sprawling mess of old. The company is self-financing and keeping a tight focus on pain relief products. It has a small salesforce pushing four cheap drugs, bringing in revenues of £3m to £4m a year.

Of the projects in hibernation, one could yield a drug for schizophrenia for anyone willing to buy it from CeNeS. Other parts of the old business could also attract buyers.

There was news yesterday on two interesting drug prospects. One, for tingling pain that results from a malfunctioning central nervous system, performed well in phase II clinical trials – the last work CeNeS did on it. And M6G, a new form of morphine being developed in a joint venture with Elan, is progressing through human trials, the company said yesterday. Sales of M6G could top £500m a year, if it gets to market. At 7.75p yesterday, there is little in the price for either of these drugs. The stock is worth a gamble.