HIT deserves a premium as it builds on Lyrick

Hit Entertainment; Hamleys; Oxford Instruments

Hit Entertainment, maker of the Bob the Builder children's TV programme, shuffled its management yesterday in response to completion of the $275m all-share takeover of Lyrick Studios.

Peter Orton, HIT's founder, is stepping down as chief executive to become executive chairman. Rob Lawes, who went to Dallas to oversee the Lyrick deal, is becoming chief executive. Most interesting is the promotion of Steve Ruffini, Lyrick's finance director, to group chief financial officer.

Until now, HIT has amortised its film library, the company's chief asset, over about 17 years. This has pulled profits forward. It is expected that a new amortisation policy will write the library down over about seven years, bringing HIT in line with US GAAP. That would have sapped earnings, if not cash flow. Acquiring Lyrick changes all that. In sum, HIT will soon earn enough to speed the amortisation cycle.

When we last considered HIT's investment merits in September, we advised investors to take profits. Then HIT stood at 435p, having jumped four-fold in two years, and the prospective price/earnings ratio exceeded 100. News of yesterday's board changes pushed the stock up 30p to 335p.

HIT stock tanked when the Lyrick acquisition was unveiled in February. But as a leading US video distributor, Lyrick is not only profitable on its own, it also promises to pump up margins on HIT's videos.

For the current year to July, acquisition-related costs are expected to nullify any contribution from Lyrick. In fiscal 2002, however, house broker Investec Henderson Crosthwaite expects EPS to more than double to 10.3p. That makes for a prospective multiple of 32 ­ on par with peers like Gullane Entertainment, the creator of Thomas the Tank Engine. But HIT, with a good track record in developing intellectual property and a stronger growth pipeline, merits a premium.

Hamleys

Hamleys, owner of Britain's most famous toy shop, is firmly back on the road to recovery and has put its recent dire trading and two unsuccessful attempts to sell the business firmly behind it.

With pre-tax profits up from £27,000 to £3.9m in the year to March and both sales and margins improving, Simon Burke, the chairman, believes that Hamleys has laid the foundations for future growth.

The successful relaunch of the flagship store in London's Regent Street in September, after a £2.8m refurbishment, boosted sales significantly in the second half. Mr Burke now hopes to make the store even more attractive by improving customer service and presentation while increasing the number of exclusive, high-margin toys its sells.

Hamleys is busy converting its downmarket Toystack shops to the more profitable Bear Factory brand, in which shoppers watch the soft toy of their choice being stuffed before their eyes. The concept is apparently a hit with young children, teenagers and adult collectors. Mr Burke aims to open 20 of these stores by year-end.

The new Hamleys catalogue and internet site are performing well. Mr Burke expects sales to top £1m in their first year. It will, however, be at least another two years before the operations make a profit.

Hamleys shares rose 9p to 132.5p yesterday, well below their high of 168p in July. With analysts forecasting earnings per share of 15.6p for the current year, the shares trade on an undemanding multiple of 8.5. While sentiment towards small retailers is generally poor, making the shares fairly volatile, Hamleys has a higher profile than many of its peers and an attractive future. Buy.

Oxford Instruments

Oxford instruments, which makes equipment for scientific research and chemical analysis, is showing signs of recovery. In the year to 31 March, the company recorded pre-tax profits of £2.7m, from a loss of £17.8m the year before. Sales were up 10 per cent to £222m. The company's restructuring, begun in September 1999, is now complete. Furthermore, it reported a record order book of £201m, up 19 per cent from last year.

The sticking point seems to be its 49 per cent share of a venture with Siemens. But their talks about the venture's future are expected to produce an outcome within months.

The company is in a much better position than a year ago and seems to be back on course. But with the shares up 17p at 185p, that makes for a forward multiple of 15, which could be a case of too much, too soon.