INVESTORS cannot say they were not warned. PartyGaming shares looked overvalued when they were floated at the end of June at 116p. The nearer they got to the 176p peak on July 28, the more they looked like an accident waiting to happen.
The share price rise from flotation day was an astonishing 52 per cent. Some clever investors rode this mustang and pocketed a profit. Others — who include as many as 150 supposedly expert institutional investors — now look like mugs. They are mugs, moreover, playing with other people’s money and drawing six-figure or even seven-figure salaries. They are also mugs who will do everything they can to cover their tracks and hope that their silly mistakes are quietly forgotten.
PartyGaming owned up to two problems yesterday. Both were entirely predictable. If there was any surprise in yesterday’s news it was that PartyGaming’s admission of weakness came so soon after the float and was portrayed in such stark terms.
The first problem is that revenues are on the skids. Since the company has been doubling and redoubling sales in the past few years, it was always a matter of when, not if, growth would slow. Problem two is that enhanced competition is reducing the profitability of the business. Was this foreseeable? Yes. An enterprise that makes money hand over fist is like a honey pot. Competition will gather in swarms, and it has gathered round PartyGaming.
It is interesting to note that the legality of the PartyGaming model, an issue that created some investment concern pre-float, had nothing to do with yesterday’s profit warning. But this only confirms that investors get easily distracted by ephemera and are hopelessly blind to the blinking obvious. Online gambling may be technically illegal in the US but it is morally acceptable and practically unstoppable.
It would be a mistake to assume that PartyGaming as a business is a busted flush. It may well make some sort of sustainable returns well into the future. Its size, if nothing else, gives ballast amid nauseating trading conditions. PartyGaming may have to rely on a harder core of committed players, however, and get used to the fact that competition will continue to drive down returns. Share price sentiment, meanwhile, is shot to pieces. Sell.
Brixton
BRIXTON has enjoyed one of the most remarkable spells in its history over the past 12 months. The company’s £675 million purchase of Industrious, a giant industrial estates portfolio from Morgan Stanley’s Real Estate Fund, helped the business to overtake its rival Slough Estates to become Britain’s biggest industrial property company. In total it bought and sold a staggering £1.6 billion of real estate, selling off its office portfolio in order to place all its focus on its core specialism. The group even sold Kennington Park, near Brixton in South London, from where the firm got its name.
The wheeling and dealing paid off, according to the interim numbers reported yesterday. There was a storming 41.4 per cent uplift in half-year pre-tax profits and an impressive 9.9 per cent rise in underlying net asset value per share. The NAV increase was driven by a solid £99.8 million rise in the value of the group’s portfolio to £2.135 billion.
Part of the rise can be attributed to falling rental yields as strong demand to buy commercial property pushes up values. But Brixton has worked hard to make its assets work harder. Part of the strategy has been to improve customer service on industrial estates by introducing a range of flexible leases. These can be agreed over the phone and the improved customer service allows Brixton to improve profitability.
These measures have met with occupier approval, particularly in the Industrious portfolio, where new lets are being agreed at 17 per cent higher rents. Sensibly, Brixton has shied away from large-scale development in the past 12 months, and in the next six months it plans to pursue only a modest building programme. This will be tailored to industrial users who want small to medium-sized units rather than riskier large-scale distribution sheds.
Shares in the company have soared to record highs in the past few weeks and trade at a slight premium to sector peers. Nevertheless, the premium rating appears to be well deserved and the solid 3 per cent dividend yield offers investors comfort. Buy.
Premier Foods
BRITAIN’S waning love for potatoes may also be affecting Premier Foods, the group better known for Typhoo tea and Loyd Grossman sauces. Despite Premier’s focus on key brands, including Bird’s custard and Quorn, acquired in June, a sizeable chunk of revenues come from potato sales. But a slump in potato prices and the loss of key contracts, in an already dwindling British potato market, wiped £30.6 million off Premier’s potato unit sales, and contributed to a group-wide 3.9 per cent drop in half-year revenues to £409.2 million.
Potatoes are not the Holy Grail for Premier — the unit’s profit is less than 2 per cent of group total — but the issue illustrates the tight trading environment faced by food companies. Organic growth for most consumer products is no more than a couple of per cent. It may do better if it is a niche product with a strong consumer proposition but even consumers may be tempted to trade down to cheaper brands.
Premier has held its own in these tough times and Robert Schofield, chief executive, believes further investment in marketing and innovation in brands such as Quorn, Hartley’s and Ambrosia should mean the company makes some progress.
The proof of the Premier pudding lies in the eating and early signs are encouraging. Premier’s interim pre-tax profit of £18.3 million was in line with market expectations so it is a little surprising to see the shares slip 11½p to 314p yesterday. But the undemanding prospective p/e ratio of 11 and dividend yield of a 4.4 per cent suggest Premier shares are well worth tucking into. Buy.
