The Investment Column: Experian's high rating is open to question after cautious outlook

UK Coal; EBTM
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The Independent Online

Our view: Hold

Current price: 505p (-38p)

The sub-prime crisis that has gripped the financial markets for the past three months may no longer be making the headlines but the fallout has plenty of legs left in it.

Experian, the world's largest consumer credit rating agency, was sharply lower in yesterday's trade on the back of cautious comments on the UK and US markets the company made along with a first-half trading update. To say that the market looks challenging is an understatement.

Even so, the numbers themselves were encouraging despite the underlying market conditions. Total growth for the first half should come in at 17 per cent, 6 per cent of which was organic. The company is confident it will hit market forecasts for the full year, implying pre-tax profits in the region of £425m, translating into per-share earnings of 31.9p.

However, the shares have been highly rated since demerging from GUS a year ago, so it is no wonder the market reacted so negatively to yesterday's statement. But bad news rarely comes in ones and investors have little reason to believe that there is going to be any positive news in the credit markets any time soon.

Of particular concern is the performance of LowerMyBills, a US subsidiary involved directly in the sub-prime mortgage market, where revenues fell by 20 per cent. Experian said that not including LowerMyBills organic growth would have been 2 per cent higher, but that is completely irrelevant.

The news from outside developed markets was more encouraging. The 65 per cent stake in Serasa, a Brazilian agency acquired in June for $1.2bn (£590m), delivered organic growth at constant exchange rates of 46 per cent, and with an $800m war chest Experian is well positioned to make further acquisitions.

The shares trade on approximately 14.3 times forecast 2008 earnings, not overly expensive but not exactly a bargain either. The fallout from the sub-prime disaster is just beginning to filter through and the downside risk must outweigh the upside. Despite this solid performance and yesterday's sell off, there are not enough good reasons to buy the shares. Hold.

UK Coal

Our view: Hold

Current price: 528p (+23.5p)

The share price momentum that drove UK Coal to deliver about 300 per cent of upside between January 2006 and April 2007 appears to have run out of steam. Fair enough; the upside was on the back of a re-rating of its property portfolio, and most of it is at the developmental and pre-planning permission stage anyway.

Yesterday, the company confirmed that it has signed a coal supply deal with the German utility giant E.On for six million tonnes of coal over the next four years. The market reacted very positively, but investors looking at the stock should not be tempted in on the back of what is really a routine contract re-negotiation.

Yes, the deal is a decent size, and at far more favourable financial terms for UK Coal. But it does not materially impact profit forecasts and the outlook remains the same from September's bullish update.

However, with the property side of the business dominating the numbers and investor sentiment, it is easy to overlook the fact that the mining side of the business will move into profitability in the second half of the year. Moving more contracts to reflect the current price of coal will add to the investment case, and with more production at lower-risk surface mines cashflow should keep those who bought for the property assets satisfied. Despite yesterday's deal most of the upside is already priced into the stock. Until the property side of the business makes another quantum leap forward the shares look fully valued. Hold.

EBTM

Our view: Buy

Current price: 4.75p (unch)

Fashions come and go but the popularity of heavy metal t-shirts amongst teenagers desperate to emblazon band names such as Slayer, Kiss and AC/DC across their chests has never dimmed. With teenagers less inclined to spend their money on CDs these days, merchandise is an important growth driver for the music industry.

That's good news for EBTM (Everything But The Music) a music-inspired fashion retailer. Its products range from the traditional metal t-shirts that drive parents mad to fashion inspired by popular bands, whether designed by artists such as punk band Blink 182's Atticus range, or replicating an artist's look such as the cardigans worn by metal softies My Chemical Romance. It also operates online stores in conjunction with metal bibles Kerrang! and Metal Hammer.

EBTM's revenue has risen eight-fold over the past year and it is set to record its first profit next year. The shares have been hit on the back of concerns over a potential downturn in the retail sector, but the company is less exposed to such trends given it predominantly sells online. It's also very cheap, trading at 5.4 times projected earnings for 2008, falling to a bargain basement 3.7 times in 2009 according to Blue Oar.

As Krusty the Klown once said, t-shirt sales are the sweetest plum, and even if this is not one for widows and orphans, it could be one for rockers. Buy.

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