The Investment Column: Demand from Asia Pacific makes TNS a buy

Overseas strategies boost Robert Walters; Travis Perkins continues to struggle under Wickes' woes
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The Independent Online

But TNS is a good company and the share price weakness is a buying opportunity. Interim results yesterday carried some bad news about the UK and US markets, but that was outweighed by better news from elsewhere.

The market reacted well to the numbers, and the fairly bullish outlook statement issued by Mike Kirkham, the chief executive, gave the share price a 4 per cent fillip to close at 206.25p.

The company provides market research for consumer goods companies, pharmaceutical firms, car makers, technology groups and media businesses. About 25 per cent of its revenues, which in the six months to 30 June were up 3.1 per cent to £460m, are from so-called syndicated services.

This is market data, such as a study of UK household consumption patterns, which is owned by TNS then sold to large numbers of consumer goods companies. Margins are higher in this area than in TNS's other, much larger revenue source, custom businesses, which are bespoke items of research undertaken for individual companies who buy the data exclusively.

That split is unlikely to change much but TNS is improving margins in both parts of the business by conducting more research over the internet, a low-cost way of collecting data. Operating margins in the group rose from 9.3 per cent to 9.5 per cent in the latest six months.

Its UK business has been hit by a general decline in consumer confidence in the second quarter that resulted in demand for its research data declining. In the US, two big technology clients cut back spending while TNS has been shifting its sales efforts among pharmaceutical clients away from studies related to new drugs to research on branding and marketing. In France and Germany TNS has been boosted by its political polling business and demand for market research covering Asia Pacific markets such as China, where TNS is No 1 in its field, has been booming, along with local economies. A price-earnings ratio of 15.2 this year falling to 13.7 next makes it a buy.

Overseas strategies boost Robert Walters

Investing in the recruitment industry has not been a very rewarding business over the past 12 months, as fears of a sharp UK economic slowdown, followed by a contraction in the employment market, have held back the sector's share prices.

But while such conditions could upset the industry, investors have increasingly overlooked that many of the London-listed recruiters are no longer dependent on their home market.

Unveiling its interim results yesterday, Robert Walters, one such agency, boasted a better-than-expected 33 per cent rise in profits, spurred by strong growth in its Asian and continental European operations. And while the threat of tougher times in the UK has not evaporated, the group has stripped costs and expanded its client baseto protect itself against a downturn.

With revenues and profits growing in Robert Walters' key markets, and its shares trading on a considerable discount to the sector, this anomaly has been hard to reconcile within the group. But given management's promise to consider embarking on a share buy-back programme, and the possibility of consolidation in this sector, a re-rating in Robert Walters' share price may be only around the corner. Buy.

Travis Perkins continues to struggle under Wickes' woes

Travis Perkins is struggling to persuade its shareholders that its recent acquisition of Wickes was not a botched job.

The builders' merchants sealed the purchase of the DIY chain in February, just as the market peaked. Sales have been falling ever since, forcing a profits warning from the group in July.

But yesterday's interim numbers showed the underlying sales fall at Wickes has worsened from 5 per cent in the first half to 7.4 per cent down in July and August. Even the core trade arm, which is still two-thirds of the business, revealed lower sales and margin pressure as rivals slash their prices.

To compensate for falling sales Travis Perkins is following its bigger rival, B&Q, in cutting back-office jobs. It is slashing 150 of 1,000 back-office posts at its Northampton base. It has also axed 750 of its 14,000-strong shopfloor workforce. This should help it achieve £15m of cost savings this year and £35m in 2006.

The group attempts to put on a brave face, arguing there are plenty of hospitals, schools and homes that need building or simply renovating, but its claim that building activity from the Olympics will boost trade from next year is merely clutching at straws.

Pre-tax profits for the six months to 30 June were £110m, including a £8.4m boost from buying Wickes, on sales of £1.29bn. Last year Travis Perkins made £100.6m in the same period. We advised taking profits in February, when the shares were worth more than £19. They closed 5 per cent lower at £14.75 yesterday. Avoid.

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