Investment Column: Pugnacious WH Smith ready for all-comers

BTG; Fenner

Alistair Dawber
Thursday 13 November 2008 01:00 GMT

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Louise Thomas

Louise Thomas


Our view: Hold

Share price: 345.75p (-11.25p)

Bring it on, is the cry from WH Smith, which claims to be happy to go into battle with the likes of Amazon and Tesco over Christmas book sales. Indeed, this combative attitude has done the nationwide newsagent's investors no harm at all, with the stock achieving something almost unheard of for a retailer and rising by 2 per cent in the past month.

The group issued a threadbare trading statement yesterday, saying the financial year has started as expected: the consensus among analysts is for annual pre-tax profits to hit £79m to £80m. According to a spokesman for the group, investors should not read too much into the fact that like-for-like sales are down 4 per cent as the company has cut the volume of low-margin DVDs and CDs it sells.

The group concedes that it is not recession-proof, but reckons sales of fizzy drinks and newspapers, its bread and butter, is about as safe as anything else for retailers. As for Christmas, watchers at Dresdner Kleinwort argue the group will emerge as a seasonal winner, but do not think this will move the shares. Those at Morgan Stanley broadly agree, saying the group trades pretty much in line with the rest of the sector: "WH Smith is trading on 8.9 times calendarised 2009 earnings... versus the UK general retail sector on 8.8 times."

Arguably, investors should give the group credit for its performance in the past few months, but with the economy in a recession likely to be worse than first thought punters should think twice before buying even the best retailers. Hold.


Our view: Buy

Share price: 152.5p (+1.25p)

Biotech and life science groups are traditionally not the type of companies investors should be buying in a downturn. In good times, such groups can raise money with abandon, pumping more and more into research without ever really having to worry too much about turning good science into profitable drugs. In bad times, however, the sector can become a graveyard of good ideas as investors get more nervous about groups that are great at developing, but not proficient at making profits.

BTG, with good reason, sees itself a different kettle of fish. The good news for investors is it is profitable: yesterday's interim results showed the firm, which specialises in neuroscience treatments, returned a pre-tax profit of £3.4m in the six months to the end of September, which comes largely from licensing deals. While the profit figure was down on the same period last year, it is the recurring royalty revenues from these licensing deals, which jumped by 17 per cent to £24.2m, that the group says is salient.

BTG's shares have soared by 34.5 per cent in the past month, which chief executive, Louise Makin, says proves that investors see the company differently to the rest of the sector. There is probably more than a degree of truth in that, especially as most other biotech groups have struggled to attract buyers in the same period.

The biggest, if unlikely, risk, warns Dr Makin, is not achieving the successful integration of Protherics, an immunotherapeutic group BTG has acquired for £218m. If merged well, the combined company will have an impressive pipeline of deals, with some suggesting a share price of £3 should not be out of the question.

A punt on any biotech firm is a risky investment, but those wanting exposure to the sector could do worse than buy BTG. With £67.5m of cash on the balance sheet and an ambition to hit the FTSE 250, investors could do very nicely. Buy.


Our view: Hold for now

Share price: 91.5p (-8.5p)

On the face of things, the engineering group Fenner should be a shoe-in for investors. The company, which spends most of its time making industrial belts for the likes of the robust coal mining industry, posted bumper full-year numbers with pre-tax profits up 8 per cent to £36.3m.

Analysts at KBC argue clients should buy the stock: "On our 2009 estimates, Fenner is trading on a calendarised price earnings ratio of 4.8 times versus the sector on 6.4 times representing a 25 per cent discount. Fenner has underperformed the industrial engineers by 20 per cent over the last month on wider commodity concerns. Today's release proves these concerns are unfounded."

But Fenner has not yet won the argument: the stock was down 8.5 per cent, despite the impressive numbers, suggesting the good news is still not hitting home. Fenner is a strong company and will be fine during the recession. The shares might do well, but buyers should wait for evidence. Hold for now.

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