The Investment Column: Discount in RHM share price may look tasty, but it is well deserved

Synergy Healthcare; Entertainment Rights

Our view: Avoid

Share price: 271.75p (+8.75p)

Mr Kipling's cakes will help RHM's interim results meet analyst forecasts. That was the key message from the food maker's trading update to the City yesterday. Sales of the cakes have offset weakness in jams and sauces such as Bisto gravy and Sharwoods Asian sauces.

The group said that the Mr Kipling brand had delivered solid like-for-like sales growth. RHM launched a lower calorie version of the cakes without artificial flavourings earlier this year in a bid to reviving falling sales of the brand. In the six months to 28 October, group revenues have risen 2 per cent despite the difficulties that its sauces and jams have faced from the hot weather. They tend to do best when it is cold outside.

Thanks to the positive noises from RHM's management, its shares registered a strong advance yesterday. Even after the rise, they still trade at only 10 times forward earnings and yield around 6.5 per cent. This is quite a discount to sector peers. However, in the case of RHM, it is deserved.

First, analysts are sceptical about the sustainability of the recovery at the group's cakes division. Second, the company's bread division has recently gained market share at the expense of arch rival Associated British Foods (ABF). This trend may soon be reversed as ABF moves to reinvigorate its bread business. Third, high energy and wheat costs look set to plague RHM for some time to come. Its shares are best avoided.

Synergy Healthcare

Our view: Hold

Share price: 685p (+2.5p)

Synergy Healthcare's growth over the past five years has been spectacular. When it listed in August 2001 it had a market value of £13m. At yesterday's closed, the group was valued at more than £250m.

With such a performance in mind one would expect the company to be on the cusp of a blockbuster drug breakthrough or to have developed some revolutionary medical device. In fact, Synergy makes its money from a much more banal activity. It cleans and sterilises bed linen, uniforms and surgical equipment for the NHS and hospitals in the Netherlands. The group's growth has been thanks to the growth of NHS outsourcing and the importance of hospital hygiene especially light of the present hysteria about the MRSA.

Synergy's purchase last August of Shiloh saw the company move into the wound care field. The City was originally sceptical about the tie-up, as Shiloh was heavily loss making. But, the group has succeeded in turning the business around. Shiloh made a profit of £1m in the eight months following the deal. Synergy is now back on the acquisition trail. Last week it made a £143m bid for Isotron - a move that will create a £400m medical sterilisation group if successful. Isotron offers cleaning and sterilisation services to hospitals and is known for its use of gamma radiation technology to sterilise wound dressings and surgical instruments. The tie-up offers Synergy great cross-selling opportunities - Isotron has a global distribution network via which Synergy could expand outside the UK and the Netherlands.

Analysts forecast the deal to be earnings enhancing. But, Synergy must be careful not to be pushed into overpaying. Many in the City expect a counter bid for Isotron.

Yet even without Isotron, Synergy should continue to flourish. Yesterday, it won a contract in south Manchester worth £5m a year in turnover for the next 15 years. This is typical of the kind of contracts the group regularly secures. They helped Synergy make a pre-tax profit of £12.8m last year and this is forecast to rise to £15.2m this year. Although the stock trades at 25 times forward earnings, it is worth holding on to.

Entertainment Rights

Our view: Worth a punt

Share price: 29p (+0.5p)

There was a well-argued investment note from Dresdner Kleinwort yesterday on Entertainment Rights, the company behind a number of kids' TV characters.

The broker points out that Entertainment Rights has quietly built up a substantial back catalogue and portfolio of characters including old favourites such as Postman Pat, Basil Brush and Rupert the Bear.

Within the realm of TV rights, children's characters look to be something of a sweet spot. They target a reliable audience - it will always be there as long as people keep having children - while kids' characters also tend to have a remarkably long shelf-life. Children's memories are short and the appetite for repeat viewing tends to be very high, allowing the content to be aired on television on numerous occasions with no real detriment to viewing. It also means that video release of content already broadcast on TV still sells healthily.

There are few TV genres with such characteristics, making the whole industry look very attractive from an investment point of view. According to Dresdner's forecast, ER shares trade at just 14 times forward earnings, making them well worth a punt.