Investment Column: Light at the end of tunnel for Mitie

Sanctuary hits the right note as half-year profits beat expectations; Merrydown a hold after its recovery
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The Independent Online

Shareholders in Mitie, the cleaning and security group, would be forgiven for abandoning hope that they will ever clean up with their investment. After hitting highs of 190p-plus in 2001, the stock has drifted. The shares have all but ignored the recent stock market recovery, moving sideways during the past 12 months and justifying our "avoid" recommendation.

Shareholders in Mitie, the cleaning and security group, would be forgiven for abandoning hope that they will ever clean up with their investment. After hitting highs of 190p-plus in 2001, the stock has drifted. The shares have all but ignored the recent stock market recovery, moving sideways during the past 12 months and justifying our "avoid" recommendation.

What's worse, Mitie appears to have done very little wrong. Its reputation and client base have grown, spanning such impressive names as the Houses of Parliament and Rolls-Royce, while it has also made a series of successful bolt-on acquisitions. But its share price has not responded.

Founded at the end of the 1980s by David Telling, who died last year, Mitie (Management Incentive Through Investment in Equity) was created around the principle that a well-incentivised workforce is the key to a successful business. And for many years, this system worked incredibly well. But the problem with equity-based schemes is that when the share price falls, the incentive is diminished greatly. This may not be the key to the stock's current lacklustre performance, but a prolonged period of underperformance will clearly have done little for employee motivation.

The real story behind Mitie's share price probably has more to do with a lull in the support services sector as a whole. However, a recovery now looks finally to be on the way.

Yesterday's results revealed a 35 per cent rise in second half pre-tax profits and a positive outlook for the coming months. Furthermore, the shares responded with a 4 per cent leap. Could this be the light at the end of a very long tunnel?

Maybe, but now is not the time to sell. Those with the patience to wait while the company takes advantage of the sector's recovery will get their rewards. Meanwhile the shares look cheap. Buy.

Sanctuary hits the right note as half-year profits beat expectations

Sanctuary was playing sweet music again yesterday when the record label and band management group comfortably beat expectations with half-year results showing 31 per cent like-for-like sales growth to £82.2m and pre-tax profits rising 15 per cent to £6.9m.

The company, which also generates earnings from music DVD publishing, merchandising and advising on tours and live performances for a roster of stars from Marilyn Manson to Jamie Cullum, normally has a much busier second half, so the prospects for the full year look good.

Sanctuary has always set out to earn revenues from as wide a range of music-related sources as possible. It has also been adept at spotting the value in ageing acts that may have lost their chart appeal but still have a high-spending and loyal following. That said, it is not just about golden oldies. Sanctuary Urban's acts include Mary J Blige, Beyonce and Destiny's Child, while other recording acts include The Strokes and Belle & Sebastian. It is also the world's biggest reggae record label business.

New revenue sources have been tapped from areas such as mobile phone ring tones. Larger music groups are adopting similarly diversified business models but Sanctuary is a compact, well run outfit worth backing. On a prospective price-earnings ratio for next year of 10.5, the shares are trading at a discount to its bigger rival EMI. Buy.

Merrydown a hold after its recovery

There was nothing sour in Merrydown's numbers yesterday. The cider company has matured well since being rescued from the brink of bankruptcy six years ago, even if its name is somewhat misleading these days.

Almost three-quarters of its sales come from Shloer, the grape juice drink behind the group's renaissance. Yesterday it said sales of the adult soft drink soared by 30 per cent in the year to 31 March as it pushed the brand into posh squashes, cans and different flavours.

Nigel Freer, the chief executive who has masterminded the recovery, reckons the UK is his oyster, given that even the hardest Shloer drinker consumes just four bottles a year. He is also quietly optimistic about the cider market. While total cider sales rose 4 per cent to £6.37m last year, sales of its Merrydown Vintage soared by 10 per cent.

Pre-tax profits rose 26 per cent to £1.72m last year, while share buy-backs boosted its earnings per share by 33 per cent. The shares, up 0.5p to 94p, have frothed higher since we backed them last year and are worth hanging on to.

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