The Week In Review: Homeserve in search of the way forward
Saturday 29 September 2007
Where does Homeserve go from here? The emergency repair group put out a trading statement this week confirming that earnings for the first six months of the year are on track.
However, having lost out this month on acquiring Domestic & General, doubts linger in the City about how the company will continue to generate earnings and profits at the rate to which stock analysts have become accustomed.
On the upside, the weaker first half of the calendar year is behind Homeserve. The company should now see a sharp uptick in business; burst pipes and other household calamities naturally increase in the autumn and winter months.
Homeserve is trading at 20 times the forecast 2007 earnings. Some analysts expect this ratio to fall next year, and now looks like a good time to take a break and watch Homeserve's next move unfold from the sidelines. Sell.
Document-management software may sound somewhat prosaic compared to the hi-tech gizmos end of the technology market. However, it is a fast-growing sector, and Invu is one of the better-known providers of systems to aggregate and order documents. It targets small and mid-sized companies, and achieves a gross margin of well over 90 per cent. The more bullish argue that Invu should sit on a premium rating compared to its peers, and that a recent fundraising and reorganisation of its shares should see its stock heading back towards the 40p level and beyond. But investors should be wary of betting the form before there is some solid evidence that the upturn is on the way. Hold.
Investors could be forgiven for running a mile at the mere mention of the name Coffee Republic. The company has, after all, spent 12 years charging two quid for a cappuccino and yet still failed to make money out of it.
But the new chief executive, Steven Bartlett, has been busy signing new franchise deals to bring the company back to life. He might have found a formula to turn this long-time ugly duckling into a swan. Based on that, it is worth tucking a few of these shares away to see if he has. Buy.
Aberdeen Asset Management
It was not so very long ago that Aberdeen Asset Management's very existence was in doubt after it found itself at the centre of the split capital investment trust scandal. But a recovery has been achieved by repairing the company's damaged balance sheet, and by some very sharp acquisitions. Today, it is in positively rude health, yet still trades at a slight discount to the sector. At a prospective 3.2 per cent, it also offers a better yield. Buy.
JKX Oil & Gas
Investors in JKX Oil & Gas have been laughing all the way to the bank. The company's main production assets are in Ukraine, where it has been a major beneficiary of Russia's decision to force its neighbour to pay European market rates for its oil. It will further benefit from Russia's decision to stop subsidising its own consumers by forcing them to pay market rates, too. There remain serious political risks with this stock, but the company at least has good experience of operating in this market. At 10.7 times full-year earnings, it is hardly expensive, and the decision to double the divvy to 2p is to be commended. Buy.
Chrysalis, the brand made famous for its music imprint that had a string of hits in the 1980s, has hit upon fairly hard times. It has slimmed down substantially over the years, most recently selling its radio division for £170m, leaving it to focus on music publishing. This week, it warned that its prospects over the next six months are unexciting due to a particularly light release schedule. But the publishing business is highly regarded, and the company is a clear takeover target. With music publishers in much better shape than recorded music players at the moment, Chrysalis could be worth a punt at the right price. Buy.
United Utilities provided no news about the proposed sale of its electricity business and its capital restructuring when it issued a trading statement this week. The company simply said that business was in line with expectations and that the sale process was proceeding. Given the current vogue for infrastructure assets, there appears to be no shortage of bidders. And who knows; the more focused water and waste business that will be left with UU after the sale could find itself in bidders' firing lines. It is well worth hanging on in there to see what emerges from the current turmoil. Hold.
John David Group
Something of a surprise from John David Group – that's JD Sports to you and me. It is possibly the only retailer in its little subsector not to be whinging at results time about the lack of a major football tournament leading to depressed sales of replica shirts. JD is far more differentiated than its rivals, stocking a range of brands that you will not find anywhere else in the UK and working closely to develop its own exclusives with others. Current trading continues to run ahead of expectations, and though there are worries about the outlook on the high street, the shares look cheap. Buy.
Investors in Topps Tiles have had a torrid time of it recently owing to rumours of an imminent profit warning. But this week's trading statement revealed a far more resilient business than the rumours have been suggesting. With new store openings set to continue and a successful foray into the Netherlands potentially the springboard for further overseas growth, the outlook appears healthy. And, trading on less than 11 times next year's earnings, the shares look to be seriously undervalued. Buy.
Compass supplies outsourced catering to a range of global private and public-sector customers. They seem to have put behind them negative issues such as corruption allegations regarding a UN contract. The world's largest contract caterer now expects full-year results to come in at the top end of forecasts. However, even taking into account the turnaround and hard work from management, the shares look expensive. In the longer term, investors are unlikely to have too many complaints, but in the shorter term the shares look fully priced and are not propped up by a strong enough dividend to tempt income seekers. Hold.
The omens have not been good at property and facilities services group Erinaceous for some time. Takeover talks with four potential bidders kicked off in April but the share price began falling hard a long time before the talks were officially called off in August. To compound the bad news, Erinaceous confirmed it has breached some banking covenants. It now looks like the only way out is to sell off the family silver to reduce borrowings. Erinaceous has been managed appallingly. Investors still in the stock should cut their losses and sell.
Moss Bros, the formal-wear hire and retail group which operates 154 stores in the UK, reported a small pre-tax loss of £0.8m for the first half this week. But management believes the company is now well positioned to outperform its rivals on the high street. However, while everyone else is struggling, outperformance does not guarantee profits. Although the company has a strong balance sheet with decent cash generation it takes a brave investors to punt on a high street name at the moment. Hold.
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