The Investment Column: Accsys looks a solid buy for higher-risk investors

Thomas Cook; Tribal Group
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The Independent Online

Our view: Buy

Current price: ¿3.52 (-13c)

Building anything out of wood these days might seem a little dated, except maybe for the cast of eccentrics appearing on Grand Designs. But Accsys Technologies can make practically anything out of its wood, and has been one of the best-performing stocks on Aim over the past couple of years. Yesterday's interim results hinted that there could be more for investors to get excited about.

The company has developed a process that can turn soft wood into hard wood in a fraction of the time that Mother Nature takes to perform the same task. The process, called acelylitation, resulting in "Accoya" wood, is not unlike soaking prize conkers in vinegar overnight.

A first-half loss of ¿5m (£3.6m) was in line with expectations, and most of that loss came about through listing the company's shares on Euronext. The decision to do so should pay dividends as it opens the doors to high-class institutional investors.

Revenue for the first half was up from zero in 2006 to ¿3.8m, but since the end of the financial year in September the company has signed several lucrative deals, and for the calendar year revenue is closer to ¿22m.

Two major licensing deals have been signed in the past few weeks, and the deal with Diamond Wood China looks particularly juicy. It has acquired exclusive rights to the production of 500,000 cubic metres of Accoya wood, a deal that should generate approximately €22m this year and up to ¿100m over the next three to four years.

Accsys has also rearranged its deal with the chemicals giant Celanese, which had been exclusive supplier of the chemicals required to produce Accoya. Although it now means that Celanese will place its 5.23 per cent holding in Accsys, it gives both sides greater flexibility, and should support Accsys as it attempts to develop licences on a global scale.

This is no stock for the faint-hearted, and given the strong run the shares have had there is a chance that they will tread water until new contracts are made public. But new contracts are in the pipeline, and for higher-risk investors this looks well worth tucking away. Buy.

Thomas Cook

Our view: Hold

Current price: 270p (-19.5p)

Thomas Cook Group is aiming to fly first-class rather than charter – the travel company, formed by the merger between MyTravel and Thomas Cook in June, is aiming to double its profits in the next three years.

The group told investors yesterday that it expects operating profit to exceed ¿620m by 2010, implying earnings before interest, tax, and exceptional items of more than ¿800m. Projected revenues for 2009 are also optimistic, forecast by the company to grow to ¿13bn. The company expects much of the upside to come from its financial services arm.

The optimistic outlook glosses over some important variables. Fuel price hikes are casting a dark cloud over operators, while the threat of terrorism continues to spook some travellers.

And that does not even take into account the possibility of a recession or the operational risk implied by the merger of two companies even if it does hit its revised, and very bullish, ¿200m synergies target.

Joint chief executive Manny Fontenla-Novoa believes that slowdowns usually only affect discretionary spending. People may not fly away for a weekend to Barcelona, but they don't tend to compromise their big annual getaway.

There is certainly an element of truth in that, but perhaps not enough to build an entire strategy around. Throw in the possible flies in the ointment and, no matter how sound the business model, it may be premature for any travel company to look three years out with such unbridled optimism.

While it is encouraging to hear the company talking so confidently about its future, there are too many unanswered questions to warrant recommending a buy on the stock at this stage. For investors in the stock, hang on. For everyone else, don't raid the holiday money just yet.

Tribal Group

Our view: Hold

Current price: 128.5p (-1.5p)

When a company raises the prospect of a "strategic review", analysts, investors and journalists start pondering whether the business will be carved up or sold off. However Tribal Group's strategic review, led by recently appointed chief executive Peter Martin, proved fairly prosaic as the company promised to focus on its core markets and improve profitability.

Tribal said it could make some selective acquisitions and will focus on better integrating its service across its disparate businesses. Given that Tribal is an outsourcing and consultancy business that specialises in advising customers predominantly in the public sector on business transformation, you would hope that it is in an ideal position to have made such improvements already.

Tribal has already done well in washing its hands of Mercury Health in April, strengthening its balance sheet and making a £27m profit on the sale. With revenue rising 12 per cent in the first half and adjusted pre-tax profit more than doubling to £5.6m, the company is certainly giving the impression that it has turned the corner.

Net debt has fallen to £7m from £84m last year as a result of the healthcare disposal, and the company looks in good shape to continue growing in its core public-sector markets such as education, where it is the largest supplier of Ofsted inspectors. It is valued at just 10 times next year's anticipated earnings, around half that enjoyed by its larger peers such as Capita.

However the strategic review has failed to get hearts racing, and its shares fell yesterday. Tribal is a very illiquid stock and shares have nosedived nearly 14 per cent over the past week, so investors may prefer to hold until upward momentum is restored.

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