The Week in Review: Any buyers should steel themselves
Saturday 25 January 2003
Avis Europe is buying the rights to the Budget brand in Europe, the Middle East and Africa, for £25m, gaining an instant royalty stream of £10m a year. Yet there are reasons to be wary. Avis was unable to say when the acquisition might enhance earnings. There are cost savings, but Budget may win market share from, er, Avis itself. There will be better times to buy Avis. Sell.
Colefax, purveyor of designer fabrics to Britain's country houses of Britain, has found nervousness at the top end of the housing market is eating into sales. Pre-tax profit in the six months to 31 October was £1.65m compared to £1.64m in 2001, which included the effects of 11 September. Underlying profits are falling sharply. Sell.
The high street confectioner had a disappointing Christmas. Thorntons has shut a few stores and improved products, but it is unclear how much more can be squeezed from its 390 stores. There are better long-term growth prospects in the "commercial" division, which sells in Marks & Spencer and Tesco. Valentine's Day, Mother's Day and Easter may prove Christmas was an aberration, but the shares look expensive. Best avoided.
In the short run, things have improved. It sold more businesses for £50m, the banks are off its back, debt at the end of 2002 was less than £400m, and cashflows have been stronger than the City expected. The issue is when over-capacity in the electronics industry will be worked through. Little evidence suggests an upturn yet. For hardened gamblers only.
Dolly Parton, The Strokes, Iron Maiden and Alison Moyet are all making sweet music for Sanctuary Group. Not that much of this has been reflected in the share price. Underlying profits in the year to September rose 25.6 per cent to £14.2m. The bear case for Sanctuary is that an Iraq war could force the cancellation of rock tours, as after 11 September. The bull case is a proven business model with a possible Led Zeppelin tour later this year. Good long-term value.
There are hidden gems in the software sector, and the excruciatingly named CodaSciSys is one of them. The company grew out of the European space programme in the Eighties and has an unbroken record of profit growth for more than a decade. The group is growing sales despite a recession in the software industry that looks like entering its third year. The shares are a buy.
A few years ago, a night out in one of Stanley Leisure's casinos was about as exciting as a game of Old Maid. But Bob Wiper, the group's shrewd head croupier, has changed all that. New games, such as the ancient Chinese dice game Sic Bo and electronic roulette, have been rolled out across the 37 provincial casinos, as has a revamped food and drink offering. This, and a strong showing from London casinos including Crockfords, helped operating profits at the division to smash expectations, soaring by 50 per cent to £21.8m for the six months to 27 October. After playing a poor hand in its quest to secure a tie-up with its rival London Clubs International, Mr Wiper is keeping his cards close to his chest regarding its interest in LCI's Palm Beach and 50 St James casinos, which are up for sale. Takeover rules may mean LCI is off the group's radar for six months, but Mr Wiper will clearly be back. The stock has been a winner since this column last tipped it 18 months ago, and deserves its premium rating of 14 times earnings. The prospect of further deregulation means Stanley could attract attention from overseas predators. Buy on any weakness.
St James's Place Capital
When even rich people haven't enough money to invest in the stock market, times get tough for St James's Place Capital, the upmarket insurer and wealth manager. Sales in 2002 were down 22 per cent, and down 29 per cent in the last quarter. St James's Place sells through 1,000 self-employed salesmen, who are partners in the business. It wants a further 100 by the end of the year. But even with an increased sales force its fortunes are inextricably bound to the stock market. The shares are only on a p/e of 10. But with a market rally unlikely they are best avoided.
Misys, the software firm, showed there is life in this difficult sector this week with profits up 16 per cent and a sharp rise in the share price.
Its healthcare division, which provides IT systems to doctors and hospitals was the star performer and helped counter the tough conditions hitting the other parts of its business. The company's main profit generator – its banking division -- has had a tough time. Revenues fell 9 per cent to £140m, although profits were more or less flat at around £27m, as customers continue to take a cautious approach to spending on IT. A p/e of 11 does not seem demanding but until signs emerge that banks are starting to splash out on IT systems again the stock is only a hold.
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