01/05/2003
There's a definite energy about the market at present. The ending of the war in the Gulf has collided with a better-than-expected results season (no real horror stories emerged) and a rash of MBO and takeover activity to buoy investors' spirits.
Whether it endures for the rest of the year is too difficult to call, but there's no doubt that it has already had an effect on Growth Company Investor's recommendations this year.
As things stand, our favoured ventures are up, on average, 12.8 per cent already — a very welcome result for all those that have defied the general herd and dabbled selectively in the market.
The best performance this year belongs to one of our most recent recommendations, Clover, the Australian-based firm with a profitable line in sophisticated nutritional supplements.
Backed in these pages at a mere 9p, the company has since stormed all the way to 20p, a phenomenal gain of over 122 per cent in less than four weeks.
A trading statement, which flagged up an array of major contracts for its Omega 3-enriched DHA compound, was followed by a strong quarterly report for the three months ending March 2003, putting the group in an ideal position to exploit its promising intellectual property going forward.
With the gains posted thus far it is tempting to consider taking some profits, but Clover looks very much on course to deliver more handsome returns over the long term. Hold.
The same advice applies to those who bought exposure to publishing empire Wilmington and leisure company Holidaybreak.
March recommendation Wilmington has surged from 61.5p to 76p on the back of some very interesting director share dealing (see page 46) while Holidaybreak, our April company profile, has shot up from 466p to 500p.
Holidaybreak is due to release its interim results very soon and the spate of institutional activity in its shares lately suggests that these should be in line with expectations. Sit tight.
Sygen makes gains
Shares in smallcap animal genetics and biotechnology expert Sygen have been creeping up steadily, spurred by some positive developments.
Since we recommended the company at 38.5p eight weeks back, Sygen has set up a Funded Chair of Genetic Information Systems with the University of New England in Armidale, Australia. This should strengthen the venture's network of research collaborations around the world. According to chief executive Phillip David, 'the Sygen Chair further enhances our technical capabilities as we continue to apply our genetics and biotechnology across food animal species.'
Sygen's last reported figures were for the half to end-December – pre-tax profits fell from £5.3 million to £3.1 million on sales of £63 million, a drop from £84.1 million. Encouragingly, however, the core PIC business performed well despite severe downturn in the pig cycle. The group also continued its transition to an 'indirect business model driven by royalty streams', which should slash the proportion of business. We are still buyers at the current 43p.
Bid rumour makes Luminar burn bright
It's all still going according to plan at nightclub operator Luminar, where we suggested investors should buy on its asset backing and its bid potential. As if on cue, the company has ticked higher on rumours that some form of bid is imminent.
Luminar is known to have received informal approaches from private equity firms, though chief executive Stephen Thomas has been quoted as saying he has no interest in leading a buyout. The Luton-headquartered firm is behind the world famous Hippodrome and Camden Palace venues, as well as the Chicago Rock Cafe and Jumpin' Jaks chains, and clubs targeted at the younger dance crowd like Diva, Ikon and Liquid.
Luminar last reported for the half to 1 September, when net assets came in at £492 million. Even at current levels, the shares are still trading at a severe discount. One broker following the stock is UBS Warburg — it predicts profits of £65.9 million for the full year, for earnings of 59p, and an 11.4p payout. The forward p/e of six, a 3.2 per cent forecast yield, and the possibility of of a bid render the shares as attractive as ever. Buy if you haven't. Hold firm if you have.
Freeport — on the up
Freeport, the European discount retail operator, has not been as stellar a stock as those listed above. Tipped at 366.5p last year as a solid asset play, the group promptly fell far below the stop-loss level, hitting lows of 200p.
Our update in December implored all those who had taken our advice in the summer of 2002 to show a bit of nerve and hold the stock — net assets alone equated to 534p.
In light of recent events, this advice seems very well placed. As seemed inevitable given its massive discount and enviable cashflow, Freeport has attracted a potential bidder in the form of Sears director Iestyn Roberts and venture capitalists Chris Howell and Nigel Wright, with backing provided by KPMG Corporate Finance.
However, even at 274.5p, there is still a massive disparity between market value and real value. Moreover, the prospective p/e is 11.4 and the land the company is currently developing in Europe is still apparently valued at cost. There are risks attached, to do with project financing, and a degree of uncertainty about how the new complexes will fare. But the company's track record at getting value from its developments is excellent. Success, or otherwise, will take time to be reflected in group results, as Lisbon and Excalibur (in the duty-free zone straddling the Austro-Czech border) have yet to open. But Roberts, Howell and Wright obviously consider the company very appealing, having been sold down so low.
It is unlikely that the raft of institutional shareholders will accept a bid anywhere near the current level. On a 25 per cent discount to NAV, the shares would be worth £4. Hold.
Clinton gains again
Just like Freeport, Clinton Cards initially disappointed following our coverage at 165p back in 2001. They did spurt up to almost 200p before falling back again last year.
Now, things are beginning to look very interesting because Clinton continues to play its hand very nicely, managing to increase pre-tax profits 27 per cent to £24.9 million in the 53 weeks to 2 February 2003, on turnover boosted nine per cent to £368.8 million.
New stores were opened during the year, while like-for-like sales moved up an impressive 4.2 per cent. Despite widespread fears about consumer spending declines, that trend has continued, with the ten weeks since the year-end seeing a further 3.9 per cent rise in like-for-likes.
Managing director Clinton Lewin puts this down to a greater proportion of larger stores, 'which tend to become destination stores on the High Street', adding that 'there is more room, a more comfortable shopping environment and people tend to spend more.'
As well as representing a good business story, Clinton still presents a compelling investment case. Earnings per share of 23.4p put the company on a historic p/e of only 7.6, not bad for a venture with minimal debt. The shares also yield 4.7 per cent.
Clinton now operates from 699 stores and plans to increase the number of larger sites, as well as improving its range ('nothing startlingly new', says Lewin) and is looking to reach 1,000 stores by 2010. Buy/Hold.
PRI attracts Brit interest
BRIT Insurance Holdings' 113.5p paper bid for Aim-listed professional indemnity insurer PRI is all but clinched with the PRI board's decision to recommend the offer after the withdrawal of a potential rival bidder.
PRI says directors intend to recommend BRIT's paper offer 'in the absence of any higher competing offer'. Chairman James Nelson said that talks with other 'potentially interested parties' had also been terminated.
Fully-listed BRIT is offering 1.703 BRIT shares for every one PRI, which is worth 113p with BRIT shares trading at 66.5p. PRI, which was floated last year at 107p and hit 130p in January, is now quoted at 116p, 3p more than the offer is now worth.
BRIT, which last year turned a £114 million loss into a £7.6 million pre-tax profit, had 14 per cent of PRI firmly committed to its bid and said that further indications of support now took that to nearly 59 per cent. PRI, whose market area has recently been booming, lost £1.4 million in its first four months of trading last year.
BRIT boss Clive Coates said a prolonged bid-battle would be harmful for PRI shareholders and was anxious for an agreed bid, which he now has.
Unless an extremely unlikely 11th hour rival suddenly appears, undiscovered as yet by PRI and its advisers, shareholders can either try to sell for 116p (just shy of our 117p recommendation price) or accept the bid, hoping that BRIT, enlarged with PRI, will do better for the shares.
The last possibility is fairly strong. BRIT shares are little more than half their early 2001 high and could recover strongly.
The puzzle that is AIT
There's been a worrying and inexplicable recent fall in the share price of AIT, last month's Company Watch recommendation at 23p as a buy for recovery.
The software stock, which develops customer relationship management solutions for a swathe of financial services clients like Lloyds TSB, Alliance & Leicester, and Bradford & Bingley, has now sunk from a 52-week summit of 118.5p, which is curious, considering the business still looks a classic successful turnaround play.
Back in November, AIT rolled out woeful interim figures to 30 September, with profits of £500,000 crashing to a £37.8 million loss after £23.1 million of exceptionals.
All this pain emerged after the company misread the direction of its niche market, mismanaged its cash and made acquisitions at the wrong time, all culminating in a cash crunch last year and a £20.5 million refinancing. The restructuring and refinancing caused half-time turnover to drop dramatically to just £8.4 million (£20.2million).
At the time, the company said its restructuring was substantially complete with £20 million of annual costs taken out of the business. Latest estimates from broker and adviser Arbuthnot suggested losses of £18.1 million for the year to March 2003, before a swing to a £900,000 profit for 2004.
On these 2004 numbers, the shares would be on a p/e of 3.5 — budget stuff. Hold.
