The Investment Column: Demand for Intermediate Capital makes it a buy
Regent Inns; C Salvesen
Wednesday 07 June 2006
Our view: Buy
Share price: 1,278p (-53p)
Intermediate Capital Group finds itself in the enviable position of being able to reject record numbers of potential new deals. The company helps finance leveraged buyouts and, given the colossal amounts of money being thrown at the private equity firms doing this type of takeover, few are surprised by the demand for ICG's services.
The group provides what is called mezzanine finance (or mezz in finance industry parlance), a mixture of debt and equity. It earns high interest on the debt part and gets an option on an equity stake which it can cash in when the business is sold on or floated. In addition, ICG charges a fee for managing £3bn of mezzanine finance funds on behalf of institutional investors.
The battle facing the group today is to decide which of the many buyouts to back and which to pass on. Private equity firms must invest the money they are given and increasingly pay higher and higher valuations for buyouts, which eats into their returns and makes the deal they do more risky. In its annual results statement yesterday, ICG warned there is an imbalance between risk and reward in the buyout industry with little margin for safety in a number of transactions.
But far from fearing a downturn, ICG believes it will be able to take advantage of any shake-out by taking mezzanine finance positions off the hands of distressed sellers cheaply. ICG can do this because of its permanent capital base which distinguishes it from many rivals who operate as funds with fixed lifespans.
In the meantime, the group is confident it continues to get the pick of the deals. Since the end of March, ICG has done six, leaving it on target to complete 36 by the year end. As well as being a record year for the deals the group turned down, last year was also a record for profits which easily beat analyst expectations. Core income, which excludes the cost of its new investments and the capital gains it makes on equity stake sales, rose 22 per cent to £106m. Pre-tax profits soared 98 per cent to £145m.
ICG shares lost ground yesterday, in line with falls in the wider stock market, leaving the finance house valued at just 13 times forward earnings. Investors would do well to use this and any further weakness in the stock as a buying opportunity.
Our view: Hold
Share price: 90p (-16p)
Shares in Regent Inns, the company behind the Walkabout and Jongleurs venues, crashed yesterday after it admitted that takeover talks with Alchemy Partners had ended. On top of that, trading has slowed down even further since its lacklustre half-year results in February. Off-peak trading in Walkabout and Jongleurs has fallen and some venues have suffered because of the group's tighter door policy since the Government extended bar opening hours last year.
The Six Nations rugby at the start of the year turned out to be a bit disappointing, but Regent can count on the World Cup to revive flagging sales as hundreds of footballs fans pile into its Walkabout pubs - the main sports bars on the high street equipped with high-definition television screens.
Other forthcoming sporting events should help, but there is no ignoring the fact that Regent is too small to cope with the tough high-street environment and escalating costs in the pubs sector. Indeed, its chief executive, Bob Ivell, who was parachuted in 18 months ago after Regent breached a banking covenant, remains on the lookout for a deal.
Several attempts to buy a rival have failed as Mr Ivell is determined not to overpay: Regent lost out to Alchemy in the bidding for Inventive Leisure's Revolution vodka bars, and also failed to acquire the Tiger Tiger owner, Urbium, last year. It's a case of "eat or be eaten" in the rapidly consolidating pubs world and there is still a good chance that Regent will be taken out. Hold.
Our view: Hold
Share price: 62.5p (+0.25p)
After several years of poor performance, the turnaround at Christian Salvesen seems to be gathering speed. The pan-European haulier reported an 18 per cent rise in annual pre-tax profit yesterday to £15.6m and said it had secured £120m of new business wins over the past 12 months compared with £110m in the previous year.
There was also evidence that Salvesen is enjoying increasing success in holding on to existing customers, who include William Morrison Supermarkets and BA. The rise in profits came despite tough market conditions caused by soaring fuel and energy prices.
The haulage group has been able to pass on most of the jump in petrol costs to customers. Other energy costs include the price it has to pay to keep its cold storage network running.
At 62.5p, Salvesen shares trade at a slight discount to rivals and boast a 5.9 per cent dividend yield, which is 1.2 times covered. Hold.
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