The Week In Review: Proof's in the pudding for Carluccio's
Saturday 06 October 2007
Sales over the past year at Carluccio's were up 18 per cent, buoyed in part by an expansion programme that has now boosted the company's outlets to 32. The company is also bullish about the coming months.
Since its stock market debut two years ago, Carluccio's has won plenty of support for its unique business model. But there is now scepticism about the company's scope for expansion.
Analysts wonder how well the Carluccio's model will translate to areas beyond the South-east; the company has not yet proved it can succeed nationwide.
Analysts at KBC Peel Hunt are also nervous about the valuation, as Carluccio's shares currently trade on a ratio of 27 times estimated earnings for 2008. Hold.
The £175m FirstGroup planned to raise from shareholders to help finance its £1.8bn purchase of Laidlaw will not be needed. Cashflows have been so good in both businesses that First Group reckons it can borrow the money and still retain its credit rating. Despite the overlap between Laidlaw and First's existing US business, however, it is only promising synergies of $75m a year. Investec estimates there should be scope for up to $120m over time. Trading across the group looks chipper. For the year ending March 2009, Investec puts the shares on 13.6 times earnings, with a 2.7 per cent yield. If extra savings are wrung from the US operations, that would fall to 12.5 times. Buy.
The trading statement for waste management company Shanks was solid ahead of the half-year figures with phase two of its flagship Private Finance Initiative project now complete. The substantial businesses in the Netherlands and Belgium are also doing well. Long term there is much in Shanks' favour. There was no new news on fresh PFI work, but there should be plenty of work in the pipeline. At 18 times full-year forecast earnings, yielding 2.8 per cent, the shares are not cheap, but it looks like a good long-term bet. Once things calm down from the credit crunch, this company is a solid long-term play. Hold.
Holidaybreak announced the £47.2m acquisition of NST, a provider of group travel to schools, and from a business standpoint, combining NST with its existing PGL – which focuses more on activity centres, makes all sorts of sense. The two combined operate in a growing market. The rest of the business is ticking along nicely too. The market has taken note. Pre-deal Landsbanki had the shares on 12.5 times 2007 earnings and 12.9 times 2008, with an attractive prospective yield of 4.2 per cent. The shares are not cheap, but the deal offers scope for the shares to be re-rated. Buy.
Debt Free Direct
Shares in Debt Free Direct were hit after a trading alert from Debtmatters which said sustained pressure on individual voluntary arrangement (IVA) fees by banks and other lenders meant the plans were becoming much less profitable to write. But its shares bounced back, reflecting its more reasoned reaction. Following the UK's sustained credit boom, IVA remains a growth market; talks between the sector and the banks are ongoing.
The company will next month announce the results of a strategic review, with the promise of lower costs. The shares remain more than 60 per cent down on the highs of above 570p; given the potential for growth, that's too low. Buy.
Despite signing up a slew of high-profile customers for its video search platform, including AOL and Ask.com, the shares in Binkx have slipped to below 30p compared to a float price of 45p. Yet the latest trading statement suggests it is performing well. Blinkx expects its first-half results to beat analysts' forecasts as demand for online video continues to grow. The company has already indexed 14 million hours of video content, and is preparing to launch a broadband TV service. As with any technology company early in its product cycle, Blinkx's valuation rests on its potential and confidence that it can execute its strategy. It has got off to a great start and this week's 13 per cent rise in its shares shows there is appetite for a good news story in UK technology. Buy.
It's no secret that Aveva has become one of the technology industry's favourite palindromes. The company, which provides three-dimensional plant design systems used by companies manufacturing ships, offshore oil rigs and nuclear plants, has consistently grown at impressive rates over the past few years and yesterday's trading statement did not disappoint. Aveva said that first-half results would show strong growth due to the buoyancy of its target markets, specifically in Asia Pacific and central Europe. With no signs of a slowdown, the company raised its guidance for the year as a whole, despite steep growth last year. The trading momentum triggered a wave of analyst forecast increases. On average, consensus earnings forecasts rose around 10 per cent. Even so, analysts said there could be still more upgrades to come given the company's continued contract momentum, growth amongst its key customers, and an impending new product range. The company trades at over 24 times 2008 forecasts, falling to less than 21 times 2009 estimates, if its cash is stripped out. Although that is not cheap, bottom-line growth is moving back toward the 20 per cent level and with further upgrades possible, the valuation looks justified. Given its valuation is not the highest in the high-growth tech sector, Aveva still looks to be one of the most attractive investments in the sector. Buy.
Ted's been decidedly out of fashion on the stockmarket, at least since the start of this year. After years of runaway growth, it's been downhill all the way. Yesterday, however, the shares showed a bit of life after interim results which were reasonably well received. Is the company coming back into fashion with investors? Up to a point. Profits were in line, but flat. While retail (Ted's own shops) and licensing (where it sells through a third party but retains control of the brand) were up, wholesale, where others sell, was down. This was explained by the company saying it had ditched certain outlets that "weren't right for the brand". Worryingly, the company's operating cashflow (as opposed to profit) turned negative. Ted is one of those brand businesses, and it lives or dies on how that brand is perceived. So far the signs for the key second half look good, so perhaps it is worth looking beyond the cashflow and flat first half, which was not unexpected by the City. But at 15 times' full-year earnings, these shares are hardly end-of-year-sale steals and the prospective yield of just under 3 per cent is nothing to write home about. There are also concerns about how active consumers will be in the run up to Christmas. Ted Baker has been an impressive growth story up until now. But it is not in fashion with us at the moment. Sell.
Halfords. the auto, leisure and cycling retailer issued a half-year update yesterday in which like-for-like sales were up 5.5 per cent, encouraging returns against tough comparatives and a bad few months for the retail sector. The group was particularly keen to highlight the success of its cycling and camping businesses. The retailer has diversified into three divisions. The range means it is less at the mercy of consumer cycles with analysts labelling it a defensive play; its in-car electronics division has proved popular.. While some have warned that a fall in demand would seriously dent the group's revenues, there is room for growth. The group is hoping to grow by keeping up with technology trends and expanding the number of stores in the UK and abroad. Halfords remains a solid performer in uncertain times and trades at about a 4 per cent price to earnings discount to the sector. That said, investors looking for a quick return could be disappointed. Hold.
Lookers paid £60m for rival car dealership Dutton Forshaw from Lloyds TSB Asset finance. This might not look cheap for a business that made only £3m in profit last year. But Dutton has substantial assets, strengthens Lookers where it is weak, and will deepen its relationship with newer suppliers such as Ford and Mercedes-Benz. Lookers has lots of customers on the sort of deal that has them paying fixed monthly payments for three years, at which time they need to buy a new car. It has also, sensibly, diversified through its sizeable parts distribution business. While car sales have held up this year, the company may suffer in the event of a consumer slowdown with sentiment also working against the price. Hold.
Restructuring plans may help keep Severn Trent buoyant
This year's summer floods caused chaos at Severn Trent, the water group, sending its stock down from 1571p in May to as low as 1244p in August. That said, the stock should benefit from a successful focusing of the business, and the spectre of M&A still looms large.
The group said there would be a likely drop of £12m in full-year revenues. The potential £35m hit has been well flagged, after the group had to evacuate its Mythe treatment works when the Avon and Severn burst their banks. It hopes to recoup up to £20m through the insurance.
Beyond this, the first half remains broadly in line with expectations for the full year. Merging the head office and water teams is expected to save up to £10m by the end of March. The price to earnings ratio of 14 times is pretty much in line with the industry, and Severn Trent has a comparatively strong yield of 5 per cent. The company would not be drawn on the dividend as it is waiting to learn the size of a fine from Ofwat.
Severn Trent's name will be at the forefront of any potential consolidator. Citigroup said the potential for a takeover at 1550p per share was about 50-50, but the bid premium already in the stock will recede should no bid be forthcoming. Potential M&A, the company putting the floods behind it, and its restructuring plans could keep the shares buoyant in the medium term. Hold.
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