The Week In Review: When rising debts can lift profitability

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The Independent Online

Maxed out your credit cards? Loan sharks snapping at your heels? Near despair as your debts top £15,000? Perhaps an "individual voluntary arrangement" might be for you.

Maxed out your credit cards? Loan sharks snapping at your heels? Near despair as your debts top £15,000? Perhaps an "individual voluntary arrangement" might be for you.

IVAs are relatively new. You agree payments with an IVA arranger, who in turn negotiates with your creditors, getting them to agree to write off a portion of your debt. It is an extreme option, but at least you avoid bankruptcy.

Debt Free Direct (DFD) is one such IVA arranger, advertising on daytime telly alongside the debt consolidators but offering a less ethically dubious service. The Government is keen to promote IVAs and the market is growing at 40 per cent a year. The short-term risk is that it won't meet its broker's forecasts for the full financial year. The longer-term risk is that lenders demand DFD cuts its fees (currently about £7,200) so that more of the original debts are repaid. But this ought to be well outweighed by the growth of the market as IVAs become better known. Buy.

MAN GROUP

Because shares and bonds are prone to bear markets where investors can lose a large chunk of their money, investors ought to put a little into hedge funds, which are always focused on making absolute returns. So far, less than 2 per cent of investment is made in hedge funds, and Man Group - which manages hedge funds - is not being silly when it predicts that could quintuple in a decade. Man shares are a long-term buy.

DOMINO'S PIZZA

Domino's Pizza (the London-listed UK and Ireland arm of the global take away franchise) brought another set of tasty trading figures out of the oven this week. Domino's reckons it can stretch to 800 stores before the two nations' appetites are sated. So far, there are only 357, which means there is much growth still to come. Worth owning for the long-term.

PADDY POWER

Paddy Power is the largest betting chain in Ireland and has been expanding aggressively within Greater London since floating in 2000. The liberalising Gambling Bill should mean the pace of UK openings can be stepped up. Bookies' results are always vulnerable to a losing streak and Paddy's shares should be on a more modest valuation to reflect this. Wait for a cheaper opportunity to get in.

ENTERPRISE

Enterprise does maintenance work for utilities, such as BT and Thames Water, which want to outsource more blue-collar tasks. Even Enterprise doesn't do the work itself, using a network of contractors. It makes its profit because of the quality of its management systems, which can easily identify more efficient ways of working. Hold.

MATALAN

High street quality at half the price. That is the sales pitch at Matalan, the out-of-town discount clothing retailer. The reality this time last year was sub-high street quality at about a tenth of the price, as the stores slashed prices to clear all the unsold winter collections. Christmas 2004 was much improved, but the shares, supported by takeover speculation, are no longer in the value sector themselves. The dividend justifies holding on, but new investors should shop elsewhere.

THE RESTAURANT GROUP

The trading update this week was as cosily familiar as the menu at its Garfunkels restaurants. For starters, another encouraging performance from its Frankie & Benny's chain. For the main course, strong sales at airports, where no-frills passengers need to fill up before flying. But for pudding? A rather stale performance from high street outlets, where competition is fierce and consumer confidence waning. Take profits.

JOHNSON SERVICE

Johnson's core business (loaning factory overalls) seemed doomed to decline, but an acquisition spree has reduced this to a quarter of the group. Uniforms for the likes of Tesco and HSBC have become more important and facilities management is a whole new business. Now the group is against the top of its overdraft, it seems a good moment to take profits.

BALFOUR BEATTY

Contracts keep rolling in for all areas of this group, rail track replacement business, hospital and school building projects, road maintenance work, and increasing business for its social housing building subsidiary, Mansell. Longer-term, there are growth opportunities in the US, where it has sorted out a couple of troublesome businesses, and through its joint venture in Asia. Buy.

UNIQ

The failure of Marks & Spencer to produce sparkling sales over Christmas makes life uncomfortable not just for Stuart Rose. It also has a knock-on effect on food production groups like Uniq, which makes own-brand desserts, ready meals, pizzas, salads, sandwiches and dips. Uniq's £100m-plus pension fund deficit has caused bid talks to stall; shares should be avoided.

REUTERS

Revenues have been shrinking since the start of 2002, as the City stalled and cancelled orders for financial information and data screens. But internal problems (a bloated workforce, poor customer service and a complicated product range that was not as good as its rivals') have been fixed and Reuters has moved from being a gambler's stock to being a serious investment proposition. Buy.

MyTravel faces uncertain future

When MyTravel's £800m debt-for-shares swap was signed and sealed before Christmas, there was a temptation to cry that the UK's biggest tour operator was "back from the brink". Certainly, the threat of bankruptcy has receded, but restructuring is just the start.

Management has to hack its way through a thicket of costs before it can be certain of reaching a financially viable business. MyTravel could still find that it does not have the cash to pay for the vital cuts. Profits have been restored in MyTravel's Scandinavian and North American businesses, so the management is establishing its credentials. If everything goes according to the plan agreed with the creditors-turned-shareholders, the current share price could well be justified.

But UK consumer spending looks to have peaked and MyTravel could be looking to reverse losses in its core UK market just as demand turns down. The future of the package holiday itself is still being redefined by budget airlines and internet booking. Terror attacks continue to be a threat.

Though the possibility that you might be getting in at the bottom is tempting, MyTravel shares cannot, at this stage, be responsibly recommended.

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