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QUALIPORT
Buy Prices For Quality Shares

By Maynard Paton (TMFMayn)
July 6, 2004

The Qualiport continues to benefit from running a watch list. When the list was first introduced in June 2001, the FTSE 100 stood at 5,948 and the portfolio was valued at 21,037. On Monday (July 5th), the blue chip index had subsequently lost 18% (with dividends reinvested), while the Qualiport had gained 16% (to 24,402).

The Qualiport's watch list is now updated and published at the start of every calendar quarter. It highlights the group of companies the portfolio has its eye on, as well as the 'buy prices' considered to represent attractive valuations for each share. Details of each company can be found by clicking on the links within the list. Of course, as time passes by, things change and the buy prices will inevitably alter.

Importantly, the watch list should not be seen simply as a collection of tips. The Qualiport is run for Education, not Recommendation. Note also that this Foolish portfolio is NOT a real money portfolio and BIG mistakes have been made in the past.

So, in order of market value, here's the list:

Company                                                  Market value
             (m)
Recent share price
                           (p)
 Buy price
           (p)
GlaxoSmithKline (LSE: GSK) 65,277 1,105 1,000
Imperial Tobacco (LSE: IMT) 8,743 1,199 1,113
Gallaher (LSE: GLH) 4,296 657 597
Emap (LSE: EMA)  1,888 727 686
Johnston Press (LSE: JPR) 1,559 549 421
Associated British Ports (LSE: ABP) 1,273 398 416
London Stock Exchange (LSE: LSE) 1,090 367 341
Halma (LSE: HLMA) 576 157 129
Renishaw (LSE: RSW) 374 515 338
Capital Radio (LSE: CAP) 363 425 298
Rotork (LSE: ROR) 336 392 317
Games Workshop (LSE: GAW) 211 686 479
Ulster Television (LSE: UTV) 211 295 229

There are three points to note:

1. Member changes

The watch list has lost two constituents since the March update: DFS Furniture (LSE: DFS) and Carpetright (LSE: CPR). The former was sold in May while the latter went in June. Neither are likely to return.

Watch list substitutions have not been made for DFS and Carpetright. However, undertaker group Dignity (LSE: DTY), reviewed here, does seem to have a strong competitive advantage. In addition, a cursory glance at the telecom sector revealed Vodafone (LSE: VOD) as the obvious choice for buy and hold portfolios.

Vodafone will be covered next week and at the moment is the favourite to join the list. Going against Dignity is its short track record in listed form and a significant chunk of debt (interest cover looks to be less than three times). Dignity shares are not an obvious buy at a recent 270p price either.

Among the other watch list shares, Ulster Television (LSE: UTV) is probably the most likely to disappear in time. The ITV broadcaster is bit like Scottish Radio (LSE: SRH), which was dropped from the list earlier this year, it being another small-cap media share that has diversified away from its core operation, has not really offered much share price value over the years and is frankly tedious to write about. 

2. Results and updates

With the Qualiport now published once a week, there is no longer the space to provide a formal update on every watch list share's results. Following the March watch list, un-reviewed figures have come from Capital Radio, Gallaher, GlaxoSmithKline, Imperial Tobacco and Rotork. This table summarises the underlying progress:

Company                                 Period                          Sales             Pre-tax profit Earnings per share Dividend per share
Capital Radio     6 mths to 31/03/04 up 4% to 59.0m up 1% to 12.1m flat at 10.1p flat at 6p
Gallaher 12 mths to 31/12/03 up 10% to 3,641m up 10% to 418m up 9% to 55.5p up 7% to 29.6p
GlaxoSmithKline 3 mths to 31/03/04 down 5% to 4,943m down 11% to 1,576m down 10% to 19.4p up 11% to 10p
Imperial Tobacco 6 mths to 31/03/04 down 2% to 1,472m up 20% to 454m up 21% to 45.3p up 25% to 15p
Rotork 12 mths to 31/12/03 up 2% to 136m up 7% to 29.3m up 7% to 23.2p up 6% to 14.75p

None of the results provided much of a surprise, with the main highlights being Imperial's 25% dividend hike and a special 5.85p per share payout from Rotork.

Note also that a recent trading statement from Associated British Ports has prompted some City analysts to predict a fall in earnings for 2004. ABP's buy price is based on the group's 2003 free cash flow remaining flat.

3. Free cash flow yield

Gilt yields have been marching higher of late. The yield on the ten-year benchmark government bond recently topped 5.2%, after standing at 4.3% this time last year and averaging 4.8% thereafter.

At present, the risk-free return for investors is just over 5%. Any significant move upwards in gilt yields will see the Qualiport adjust its free cash flow yield requirements (presently 7.5%) accordingly. Demanding, say, an 8% free cash flow yield would mean reducing the above buy prices by 6%.

Maynard owns shares in Associated British Ports, Games Workshop, GlaxoSmithKline, Halma, Johnston Press and London Stock Exchange.