It is not often that European regulators lose an argument when they have the bit between their teeth, but the British speciality chemicals producer Elementis has returned from Brussels with a very handy £21 million refund.
The company has appealed successfully against a fine imposed on it in 2009 related to price-fixing in the murky, or perhaps that should be fiery, market for heat stabilisers used to produce plastic. The company appealed on the basis that it ceased to be part of the cartel in 1998 and the fine thus exceeded the European Union’s ten-year timeframe for penalties.
It may have got off on a technicality, but the reversal of fortune serves to underline the company’s turnaround. The original fine came when Elementis was better known for the volatility of its trading than for its products, but the business has been stabilised and largely revived by a focused management team. Shares have almost trebled since the start of 2010 and added a further 5½p to close at 178p on the European refund.
The funds, worth about 5p a share, virtually wipe out its debt when it is looking at opportunities to strengthen its coatings business in Brazil and Asia Pacific. Investors are unlikely to be spooked by an acquisition, given that the last deal — £40 million for Deuchem in 2008 — was perfectly timed because it increased company exposure to Asia just as demand in that continent started to boom.
Elementis traces its roots to 1844 and the Harrisons & Crosfield tea and coffee trading conglomerate, but it took its present shape in 1998, when the company focused on chemicals found in substances such as paint, cosmetics and, more recently, shale gas wells, where the flow of a substance needs to be controlled. The chemicals stop paint sagging off the wall and gas wells becoming too hot to explore. The company also makes chromium products used in metals and has revived that flagging division, which acts as something of a poison pill against a takeover by a larger rival as the environmentally dangerous product needs extremely delicate treatment and there is no natural buyer for the business.
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That helps to explain why the company, one of the largest listed UK chemicals businesses now that ICI is in foreign hands, still trades at a discount to the sector despite the bull run over the past year. Elementis, which trades on 15 times Brewin Dolphin forecasts, has shed its volatile past and consistently overdelivered on the earnings front. It looks to be in its element and could flow higher.
GW Pharmaceuticals
The British biotech community began the week in rude health with the likes of BTG, Axis-Shield, ARK and Vectura all in strong demand. However, GW Pharmaceuticals, one of the sector’s posterboys, bucked that trend, despite launching its key product Sativex in Germany.
That, perhaps, reflects the company’s transformation from a plucky biotech plugging away at its cannabis-based treatments to a fledgeling pharmaceutical company after the full commercial launch of Savitex in Britain last year. The risk of regulatory interference in new territories is thus minimised and the product being shunned much lower, so good news can be shrugged off with the “factored in” argument.
The German launch is significant because the country has the largest population of people suffering from multiple sclerosis, at roughly 130,000. It accounts for a large slice of the projected €60 million (£54 million) of sales of Sativex in Europe. The under-the-tongue spray treats spasms and cramps and GW takes a royalty payment of up to 30 per cent when its global partners sell the drug.
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Shares in the company spiked in April when it signed up Novartis to push Sativex in several countries and analysts at Peel Hunt said that separate deals in China and Japan could add further upside. The stock gained a third between April and July and the company continues to explore the cannabis plant for further development possibilities. It is already in advanced trials of a potential drug to alleviate pain for cancer sufferers.
Yet that appears a long way off and the shares are still below the level at which they changed hands when Sativex was launched last year. Investors are not yet convinced that GW will replicate Shire in its transition from biotech to pharmaceutical mainstay so a further re-rating is by no means guaranteed. Approach with caution for now.
Datatec
Detroit is known as the centre of the American automotive industry and home to the Motown record label. Yet Motor City has emerged as a new base for growth for the IT services company Datatec, which has bought out its Michigan-based rival Netarx.
The deal, which could cost as much as $34 million (£21 million), will be conducted by the company’s British-based system integration division Logicalis and will boost the unit’s revenue by $60 million a year and add 220 staff.
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Datatec has been shopping around for deals as it plots a course towards cloud computing and managed services-based growth. The company has its headquarters in South Africa and has lived in the shadow of Dimension Data, another African IT specialist, on London’s markets, but it has become more familiar to investors since its rival was taken over by NTT, of Japan, last year in a deal worth nearly £2 billion.
Datatec was early on the cloud-computing train and was perceptive in targeting Latin America before many of its rivals, so the Detroit deal has gone down well with investors often wary of American forays.
The stock has hit an all-time high of 350p in recent weeks and trades on the relatively cheap rating of 12.3 times consensus earnings. Enthusiasm is curtailed by its illiquidity on UK markets, but a Computacenter trading statement next week could reignite interest in the IT sector.
Seeing Machines
Seeing Machines started life with a system to record the trajectory of basketballs, but the AIM-listed Australian company now uses that technology to detect glaucoma and to set off alarms to wake up drowsy lorry drivers. It has appointed Ken Kroeger as chief executive after a damaging profit warning last week triggered the exit of his predecessor. Mr Kroeger brings the promise of a more commercial approach but, with shares weak, seeing will be believing.
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Gilts
UK government bonds recovered their poise after a fall last week that pushed yields to their best in six weeks. September gilt futures settled 26 ticks higher at 120.31, outperforming the equivalent German bund. However, trading was light with America closed for Independence Day. Ten-year yields dipped two basis points to 3.37 per cent.
Bet of the day
Spread-traders were buying Balfour Beatty’s share price of 314p before a trading update tomorrow. Although trading remains tough, they were backing the engineering company’s international businesses, particularly those in booming Asian markets, to offset weakness at home. Spread Co offered a price of 313.8p to 314.7p on Balfour Beatty shares.
Deal of the day
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Ultra Electronics rose 5p to £17.09 after landing its biggest contract. Based in Middlesex, the defence electronics company will be paid more than £200 million to supply the IT and security systems for Omani airports. The contract is Ultra’s first move away from defence, where budgets are under pressure in Britain and the United States.