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Investment Column: Hold Enodis regardless of bid hopes

SubSea Resources; Jessops

Michael Jivkov
Thursday 10 August 2006 00:24 BST
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Our view: Hold

Share price: 179.5p (- 37.5p)

The three-month takeover saga at Enodis has pretty much come to an end. The result leaves the maker of kitchen equipment for fast-food restaurants in the same state as at the start of the drama - as an independent entity with solid growth prospects.

Middleby Corporation kicked off the takeover battle back in May with a 195p-a-share bid for Enodis. This was rejected by the group's management on the grounds that it undervalued Enodis. Then came a counter offer from Manitowoc, a Wisconsin-based maker of kitchen equipment as well as cranes and ships, at 210p. This too was turned down by the UK group. However, when Manitowoc returned with a 220p cash offer, Enodis agreed to hold talks with the US group and allowed it to conduct due diligence.

This process came to an end on Tuesday night with news that both parties had abandoned discussions. Few were surprised to see Enodis shares fall 17 per cent yesterday in response. The talks are believed to have failed because of the regulatory hurdles facing the tie-up in the US - namely antitrust issues. Manitowoc and Enodis are major players in the market for ice machines across the Atlantic.

So where now for Enodis? Well, Middleby has until Monday to table an improvement on its 195p offer. Few expect it to do so. The company seemed to drop out of the battle when the Enodis price crossed 200p, while the UK group's board will find it difficult to accept anything less than 220p.

Nevertheless, Enodis is in good shape as a stand-alone business and should enjoy solid growth in the coming years. During the bid saga, it issued an impressive set of interim results (which boasted a 200 per cent jump in profits to £24m). Then, earlier this week, came a trading statement showing the group enjoyed 12 per cent revenue growth during the 13 weeks to 1 July.

With pressure on fast-food joints such as McDonald's, Subway and Burger King (all are Enodis clients) to provide healthier and more diverse menus, Enodis has been cashing in on the industry's attempts to clean up its act by supplying the necessary equipment to aid their transition.

At yesterday's close, shares in Enodis stood at a hefty premium to those of its peers, reflecting the belief in the City that a fresh bid for the company is bound to emerge some time in the next 12 months. That is probably a fair bet, but even without this prospect the stock is worth holding on to.

SubSea Resources

Our view: Worth a punt

Share price: 40.5p (+6.5p)

The salvage company SubSea Resources finally had some good news for its investors yesterday. The Alternative Investment Market-listed group announced that it had recovered about 12 tonnes of copper from its Celia project. The material will be distributed to the company's sales agents for valuation.

The shipwrecks that SubSea targets are usually owned by the financial companies that had insured them. The group either buys the rights to the booty on board or cuts a deal with the insurer for a per cent of the sale value. Over the past 20 years, it has built up a database of more than 12,000 wrecks. Prime targets are identified according to cargo and ease of salvage operation.

After the area of the wreck is surveyed and the ship located, the recovery is undertaken by the Geomaster, a 117m vessel capable of holding its position over the target area even in force seven winds. A remotely operated grab is then used to recover the cargo from within the shipwreck and brings it to the surface. The Geomaster can haul a maximum of 400 tonnes a day in optimum conditions. SubSea's technology enables it to go after wrecks lying up to 6,000 metres below the sea surface, which is far deeper than the traditional cut off point of 300 metres.

The stockbroker Ambrian Securities estimates the value of the cargo SubSea recovered from its Celia project at about £17m. The group has another four projects scheduled, which Ambrian estimates could be worth £93m. That is more than double the company's current market capitalisation, which makes its shares worth a punt.

Jessops

Our view: Buy

Share price: 122p (-5p)

ABN Amro Capital sold its remaining 17 per cent stake in camera retailer Jessops yesterday. Having floated the group two years ago at 155p a share, the private-equity arm of the Dutch bank sold the last chunk of stock at 120p.

Those who bought yesterday look to have got themselves a good deal. Jessops, which is in recovery mode after a nasty profits warning last year, told brokers this week that it had a good July. The month alone accounts for nearly a third of its annual profits and is on par with Christmas in terms of importance for the retailer.

While the group has another seven weeks to go before the end of its financial year, all its key trading periods are now complete and to budget. Meanwhile, later this month, investors can expect the launch of the retailer's new website which will allow customers to have their pictures processed remotely.

Jessops shares trade at a sizeable discount to peers - at 11 times forward earnings compared with 15 times for the wider sector. That makes them worth buying.

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