The Investment Column: Fears of rising costs are overdone at Bodycote

Panmure Gordon; Mears Group
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The Independent Online

Our view: Buy

Share price: 237p (+11.5p)

Worries about rising energy costs left shares in Bodycote 5 per cent lower yesterday. This was despite a strong set of interim results from the engineer which saw its profits rise by 20 per cent to £35m and revenues jump from 22 per cent to £279m.

The group's heat-treatment technology makes metals, usually used in the aerospace, car and oil and gas industries, stronger and more durable. Energy costs are obviously important in this line of business, but it is difficult to see what investors are so concerned about.

Bodycote's chief executive, John Hubbard, assured the City yesterday that he had spoken to the group's major customers and that they had been understanding about the situation and were willing to accept the higher prices it entails. As a result, the company should have few problems in meeting forecasts for the full year.

Meanwhile, Bodycote continues to shift its operations to low-cost countries in Asia and Africa. Yesterday, Mr Hubbard trumpeted a planned move into India and Mexico. He also said the Cheshire-based group's acquisition spree would continue into the second half of the year. The company bought 10 business in the six months to 30 June, spending £51m. Investors should not be surprised if this figure has reached £90m by the end of the year.

After yesterday's fall, the Bodycote stock trades at a discount to rivals while it is expected to generate above average earnings growth.

Panmure Gordon

Our view: Buy

Share price: 147p (+0.5p)

Shares in Panmure Gordon have lost nearly a third of their value over the past six months amid worries about the outlook for global equity markets. Despite these concerns, business has been strong at the stockbroker.

Yesterday, it reported a jump in first-half pre-tax profits to £5m from £400,000 previously. Sales more than doubled to £18.3m from £7m. This means Panmure has already pretty much covered its costs for the year, which stand at about £20m.

Since the start of this year, the broker has enjoyed an increase in the number of corporate transactions (floats, mergers and acquisitions and secondary fund raisings) in which it has been involved.

So where now for Panmure? Well, as with all brokers, its performance very much depends on the state of the wider stock market. In recent weeks, sentiment has improved and global equities are now not far from the highs of April.

Panmure is well placed to benefit from this pick-up. Its cost base is firmly under control and its pipeline of possible floats is likely to be enhanced by its new joint venture with Bank of Scotland. The group has set up a £30m fund to help finance pre-initial public offering enterprises. Once these mature and are ready for floatation Panmure can expect to handle their listing.

The recent weakness in the stock now presents investors with a good buying opportunity. Yesterday, Tim Linacre, the chief executive of Panmure, bought 25,000 shares at 147.5p. With the group trading at 11 times forward earnings, readers would do well to follow his lead.

Mears Group

Our view: Hold

Share price: 278p (+7.75p)

Bob Holt, the chairman of Mears Group, bought control of the support services company in February 1996 for £50,000. He floated the company on AIM in October of that year, valuing it at £3.6m. Anyone who bought into the Mears float nearly 10 years ago would have made their money 25 times over.

This performance makes the company one of AIM's great success stories. And, as yesterday's interim results from Mears show, it continues to go from strength to strength. In the six months to the end of June 2006, sales rose 22.5 per cent, profits 23 per cent and the interim dividend 29 per cent. It secured £170m of new business taking its order book to £1.1bn.

Given this impressive pipeline, analysts believe Mears should be able to generate earnings growth of 30 per cent or more this year and next. Such a performance is most often seen in the technology and internet sectors. However, the AIM group operates in a much more simple industry. It paints council houses, mends leaky taps and broken windows and does a spot of rewiring.

The outsourcing trend in the social housing arena is robust (as the new business wins Mears unveiled yesterday show) and should received a boost from the Government's Sustainable Communities initiative.

Mr Holt sold the bulk of his stake in the group in December. But that should not unsettle investors. The disposal is part of his decision to take a more back-seat role at the company after hiring Stuart Black from the fellow support services player, Mouchel Parkmen, last year. Trading at 20 times forward earnings, shares in Mears are worth holding on to.

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