The Investment Column: French Connection finding menswear a tough nut to crack

Telent; Alea Group Holdings
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Our view: Buy

Share price: 240.75p

If ever a company were guilty of killing the goose that laid the golden egg, it's French Connection. The fashion retailer's "FCUK" advertising slogan went from being a stroke of genius to a tiresome turn-off, and, as a result, the company has endured a shocking couple of years.

The shares are worth just over half of their May 2004 value - during which time the FTSE 250 has more than doubled. Profits at French Connection have shrunk from £38.1m to just £4m last year. Depressing stuff.

But all is not lost. Although the shares fell 20p yesterday on the back of the interim pre-close trading statement, there are signs that the company is turning around. It looks like the ladieswear range is right for the summer and although menswear is proving a harder nut to crack, first half sales in the retail division are up 5 per cent on a like-for-like basis.

A small decline in wholesale orders for winter and autumn 2007 was mainly down to the transfer of some franchises into the wholesale division and came as no surprise, while the company retains a healthy cash balance of £33.5m. The company expects to add to its cash pile this year and remains virtually debt-free.

The one spanner in the works is Toast, the group's catalogue and online upmarket womenswear venture, where current trading was described as "very disappointing". Toast looks badly burned but the company is confident its performance will improve.

Founder, chief executive and chairman Stephen Marks still owns 42 per cent of the company so shareholder interests are firmly aligned with management.

Fashion retailers live and die by the strength of their ranges, something that French Connection is painfully aware of. But the time to invest in a turnaround situation is before it is completed and French Connection, still a strong brand name, looks worth a punt for investors with plenty of nerve.

Telent

Our view: High risk buy

Share price: 500.25p

The communications firm telent (yes, it is a small t - dotcom marketing gurus didn't all disappear overnight) is the rump of the old Marconi business that was at the centre of a bid struggle between hedge funds Fortress and Polygon last year.

Fortress offered to buy the company for £346m but the takeover was blocked at the last minute. Polygon, by then telent's largest shareholder, argued that the bid undervalued the company due to millions of pounds held to ensure the company could meet pension obligations.

Although telent's results for the year to the end of March showed deterioration in revenue and profits, revenues surged 10 per cent in the second half and the resumption of the dividend shows the company is heading in the right direction.

Chief executive Mark Plato has outlined a plan to grow sales organically in the high single-digit range and to target selective acquisitions. However in the longer term, telent faces scale issues and is overly reliant on its main customer, BT.

Analysts continue to point to telent's enormous cash balance as the main source of potential upside in the stock. The company had a cash balance of £749m at the end of the year, of which £514m is held against pension liabilities. Given telent's market capitalisation of £312m, the potential to release some cash from the escrow account and feed it back to shareholders is significant. The underlying business is recovering, but on the cash balance basis alone the shares are worth a punt.

Alea Group Holdings

Our view: Sell

Share price: 103p

Shares in Alea, the reinsurance group, have plummeted by almost two-thirds since they were floated on the London market at the end of 2004. A series of heavy hurricane claims in 2005 was mainly to blame, after which investors refused to back an equity fund raising to get the business back on its feet.

Since then, Alea has closed all its active divisions, and sold off everything but its legacy book of business.

The board gave shareholders an escape route by accepting an offer from the Fortress Investment Group at 93p a share. However, a handful of medium-sized investors refused to back the bid, claiming Alea's net asset value is almost 50p a share higher. Although Fortress raised its offer to 96.5p a share last week, the rebel investor is looking for at least 20p a share more.

Assessing the value of a back-book of reinsurance is never a precise science and some analysts believe the true value of Alea is not nearly as high as the rebels are claiming.

There is no guarantee that shareholders will ever realise any more than 96.5p a share even if the company was allowed to run off over time, so investors should take what the market is offering and head for the hills.

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