QUALIPORT
Buy Prices For Quality Shares

By Maynard Paton (TMFMayn)
April 5, 2005

The Qualiport continues to prosper from running a watch list.

When the portfolio first introduced its watch list in June 2001, the FTSE All-Share index stood at 2,879 and the portfolio was valued at £21,037. By Monday (4 April 2005), the FTSE All-Share index had subsequently lost 4% (with dividends reinvested), while the Qualiport had gained 31% (to £27,552).

The Qualiport's watch list is 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 'buy prices' considered to represent attractive valuations for each share. The latest review of each company can be found by clicking on the links within the list. Of course, as time passes, things change and the buy prices will inevitably alter.

Importantly, 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 current list:

Company	Market Value (£m)	Share price (p)	Buy price (p)
Vodafone (LSE: VOD)	90,916	141	122
GlaxoSmithKline (LSE: GSK)	71,322	1,218	980
Imperial Tobacco (LSE: IMT)	10,129	1,394	1,253
Gallaher (LSE: GLH)	5,071	776	631
Emap (LSE: EMA)	2,140	832	665
Johnston Press (LSE: JPR)	1,560	548	492
Associated British Ports (LSE: ABP)	1,479	478	392
London Stock Exchange (LSE: LSE)	1,176	462	357
Halma (LSE: HLMA)	593	161	129
Renishaw (LSE: RSW)	546	750	373
Rotork (LSE: ROR)	402	469	338
Capital Radio (LSE: CAP)	344	403	341
Ulster Television (LSE: UTV)	278	519	307
Games Workshop (LSE: GAW)	159	503	515*

 (*Set prior to trading statement issued 4 April 2005. See below)

Sadly, there are no shares this portfolio would consider buying at present.

Results and updates

Eight watch list companies have published results since the previous watch list update in January. The statements from Associated British Ports and Johnston Press were reviewed here and here. The achievements of the other six are summarised below:

Company	Period	Sales	Pre-tax profits	Earnings per share	Dividend per share
GlaxoSmithKline	12 months to 31 Dec 04	Down 5% to £20,359m	Down 9% to £6,119m	Down 9% to 75.0p	Up 2% to 42p
Gallaher	12 months to 31 Dec 04	Up 10% to £3,985m*	Up 7% to £446m	Up 6% to 58.9p	Up 6% to 31.5p
Renishaw	6 months to 31 Dec 04	Up 24% to £72.5m	Up 83% to £12.2m	Up 76% to 13.4p	Up 9% to 6.1p
Rotork	12 months to 31 Dec 04	Up 8% to £147m	Up 8% to £31.8m	Up 6% to 24.7p	Up 2% to 15.1p**
Games Workshop	6 months to 28 Nov 04	Down 1% to £71.0m	Up 5% to £7.7m	Up 7% to 15.8p	Up 5% to 4.95p
Ulster Television	12 months to 31Dec 04	Up 18% to £63.5m	Up 28% to £17.5m	Up 24% to 23.3p	Up 15% at 11.5p

(*excludes duty **excludes special dividend of 5.85p. All figures are adjusted for goodwill and exceptional items)

Some opinion on the recent reporters:

Glaxo

Glaxo's recent progress has been hampered by patent expiries and the weakening US dollar. In the final quarter of 2004, underlying operating profits at the pharmaceutical firm fell 13%.

Something to consider about Glaxo's accounts is the forthcoming impact of International Financial Reporting Standards (IFRS). Had the new reporting regime been applied in 2004, Glaxo's headline earnings per share would have been reported as 68.1p, some 10% lower than the actual 75.0p.

The IFRS impact on Glaxo's earnings largely concerns share-based payments to employees; this particular cost (excluded from the main profit and loss account) was £314m in 2004. Though 2005 is expected to see share-based costs reduce to £200m-£250m, the charge remains sizeable and puts further pressure on Glaxo's reported income.  

(Following last week's look at goodwill, future Qualiport articles will review share-based payments and the other main changes stemming from IFRS.)

Gallaher

There are thankfully no share cost headaches at Gallaher. Preliminary figures from the tobacco group revealed its 2004 underlying operating profit of £651m would have been reduced by just £1m following this particular IFRS alteration. Indeed, the company is relatively unaffected by IFRS and continues to churn out steady profit and dividend growth. But the reliability continues to be highly prized by investors, which have bid up the shares to well above the average rating since the firm's 1997 flotation.

Renishaw

Renishaw issued the best set of watch list results in the first quarter. Key features were a strong rebound in sales, an even stronger rebound in profits and ongoing talk of 'buoyant markets'. Not surprisingly, today's valuation is not cheap. Even adjusting for a 32p per share net cash pile, the 750p shares offer a historic free cash flow yield of only 3.6%. The time to have bought the engineer was back in late 2002/early 2003, when sales and profits had contracted, the share price was around 300p and some rough recovery maths indicated a buy price of 339p.

Rotork

Another engineering firm ticking over nicely is Rotork. Respectable sales and earnings growth, plus a special dividend, were the highlights in 2004. (In addition, the preliminary statement from the actuator firm commendably included the accounting notes reserved usually for the annual report!) A net cash pile worth 28p per share and 2004 free cash flow also of 28p per share make the shares fairly priced at 469p.

Ulster Television

Another watch list share well off the value radar is Ulster Television. At 519p, it provides a rather low trailing free cash yield of 4.4%. Robust revenue growth at the media outfit's television, radio and Internet divisions, alongside a significant reduction in debt and the odd bit of takeover speculation, continue to please shareholders.

Games Workshop

January's interim results from Games Workshop became academic yesterday. The fantasy wargames group admitted to a sales contraction and profits are likely to suffer a 'material' shortfall in the current year. The 513p buy price declared in the earlier table relates to free cash produced in the year ending November 2004. Next week's Qualiport will review Games Workshop in more detail.

And a new watch list name…

Finally, the next portfolio watch list (due early July) will contain GCap Media. This is the new name for the soon-to-be-merged Capital Radio and GWR (LSE: GWG) combine. The proposed start date for dealing in what will become by far the country's largest commercial radio broadcaster is May 9.

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

Portfolio value

Holding	Number of shares	Closing price 04/04/05 (p)	Value (£)
Associated British Ports	681	477.5	3,251.78
Emap	372	824.5	3,067.14
Halma	1,920	160	3,072.00
Johnston Press	1,608	545.5	8,771.64
London Stock Exchange	2,018	455	9,181.90
Cash			207.07
Total			27,551.53