SHARES STRONGLY UP/DOWN this week 26/12/05 (Master RSI)

The Sunday Times - Business

January 01, 2006
The Sunday Times portfolio for 2006
Our Business reporters pick the shares, from airlines to online gambling firms, that they expect to perform well this year

John Waples

It is just under a year since David Levin became chief executive at United Business Media (UBM), but his impact on the £1.8 billion group has been immense. He has made several disposals, selling its automotive titles to Newsquest Media for £50m as well as its 35% stake in Channel Five to RTL for £247m.

Levin is left with a war chest of more than £600m, which he aims to use on small acquisitions to create a media group for the digital era. His business-to-business print titles are suffering from declining advertising revenues, but he intends to use the brand strength of the titles to build up an online presence. It is working, but progress is slow. UBM’s other operations include its exhibitions arm and information service, PR Newswire.

At 637p, UBM’s shares trade on a p/e ratio of 16.2 on 2006 profits and are a safe bet in uncertain times.

Dominic O’Connell

Last year I tipped Rolls-Royce, the aero-engine maker. It had promised shareholders much for several years without ever quite delivering. But in 2005 there was finally a decent payday and the shares finished the year up 73%. I still rate Rolls-Royce a hold, despite some potential pitfalls.

But this year I am choosing something a lot riskier — the low-cost airline Easyjet. The stock has enjoyed a decent run in recent months, but there remain two reasons for buying it. One is the prospect of a bid from FL Group, the parent company of Icelandair. The second is a new incentive programme for management, which gives them big rewards if they meet targets for return on equity.

But I stress this is a risky investment — there is no guarantee of a bid and, if the Icelanders pull out, the share price, now 378p, will tumble.

Richard Fletcher

This year looks like a good one for the media sector. WPP, as ever, is attractive, but I have opted for ITV, Britain’s biggest commercial broadcaster.

The Office of Fair Trading will this year review the so-called contract-rights renewal, put in place to stop ITV exploiting its dominant position after the merger of Carlton and Granada in 2004. A number of analysts expect the agreement to be phased out, which would allow ITV to raise its advertising rates.

This year could also bring a long-awaited bid for ITV — not least because the group has made a £325m contribution towards its £580m pension-fund deficit, removing a big stumbling block to any deal.

ITV looks undervalued on a p/e ratio of 15, compared with a sector average of 17. Buy the shares at 112½p.

Paul Durman

There are signs that biotech firms are finally starting to reap the rewards from years of investment. Public and private drug developers, including Protherics, Astex and Kudos, have signed generous deals with “Big Pharma”, notably Astra Zeneca, one of many struggling with a weak pipeline.

This looks a good time to bet on Vectura, a developer of inhaled drugs, with a busy year ahead of it. Vectura pulled off one of 2005’s best deals, a $375m (£217m) licensing agreement with Novartis. Within a few months, it hopes to license its GyroHaler inhaler and its PowderHale formulation technology for a new generation of asthma drugs. Also, in the next few months, Vectura will report results from clinical trials of its drug for impotence.

After trading sideways for six months, the shares look good value at 83p.

Louise Armitstead

This year I am tipping Centrica, the gas provider and one of the least loved companies in the FTSE 100. Soaring gas prices have led to Centrica ramping up domestic bills and generating paltry returns while the decline of the flagship field in Morecambe Bay — forcing the company to buy ever more of its gas in the market — adds to the woes.

But all this masks Centrica’s real potential: it is a tempting takeover target. If nobody bites, it has a big, unspent capital- expenditure programme. Also, Centrica North America could be spun off for £2 billion. And even a slight fall or stabilisation in gas prices would return to health the margins on its vast revenue stream from domestic customers. Much depends on the soon-to-be appointed management but, with a p/e ratio of 19.1 and the shares at 254½p, Centrica is cheap.

Matthew Goodman
The past year has been turbulent for online-gaming stocks, with some well-publicised ups and downs. The market has tended to lump all these shares together, but this ought to change this year, with more investors recognising the strengths and weaknesses of individual stocks.

There are a number of investment opportunities in the sector but one I would single out is 888 Holdings. It floated in September as the market was cratering. The shares fell from the float price of 170p to as low as 134p but have since recovered, in line with the shares of 888’s peers.

With a strong growth record, 888 has a more varied product range and geographical spread than its main quoted rival, Party Gaming. 888’s shares trade on 13.9 times 2006 earnings, making it slightly cheaper than Party Gaming. Buy at today’s price of 194p.

Peter Koenig

Barclays Bank is a good bet in 2006. The shares are more likely to soar than lose ground.

Let’s look at the stock’s defensive qualities. Growth in financial services has outstripped growth in the world economy during the past two decades.

I can’t see anything on the horizon that is likely to change this trend.

Barclays stands out as a British player on the global financial-services scene. In Barclays Capital, the group has what many regard as the premier UK investment bank. In Barclays Global Investors it has one of the world’s leading index- orientated fund managers.

The stock, at 611p and trading on a p/e ratio of 10.2, is also a good bet for speculators. Pundits have been predicting the consolidation of the European financial-services industry for years, and it hasn’t happened. When it finally does, Barclays is likely to be a sought-after target.

Mark Kleinman

Few retailers are likely to have enjoyed their new year celebrations as much as Charles Dunstone, the founder and chief executive of Carphone Warehouse. Over the past decade he has built the business into a high-street chain focused on innovative marketing to attract new customers.

Just before Christmas, Dunstone snapped up the fixed-line assets of Centrica and Tele2, so expect Talk Talk, Carphone Warehouse’s landline service, to play a bigger part in the group’s strategy this year.

Dunstone will also make a big push into broadband, and further acquisitions seem likely. The group already has a market value of £2.5 billion, with the shares at 277p and a p/e ratio of 25.8 times this year’s earnings.

Despite caution and predictions of a slowdown in the growth of mobile-phone sales, there is plenty of scope for the share price to rise.