The Investment Column: Harry Potter printer loses its magic

Financial services focus may pay off at Microgen; designer Marchpole is one for brave fashionistas
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The Independent Online

When earnings start to slide, one of the first places companies look to cut costs is from their glossy annual reports. But fewer, thinner and less glossy reports spell bad news for St Ives, the printing company that has made financial and corporate publishing its speciality.

When earnings start to slide, one of the first places companies look to cut costs is from their glossy annual reports. But fewer, thinner and less glossy reports spell bad news for St Ives, the printing company that has made financial and corporate publishing its speciality.

After a slump in corporate activity in the past few years, not only have glossy annual reports been cut back, but so has the need for merger and acquisition documents. St Ives still prints about 20 per cent of the FTSE's annual reports, but reporting a 56 per cent drop in profits yesterday, it said recovery in financial activity in the UK and Europe was slow and market conditions continued to be "challenging".

Corporate budgets for printed material, whether corporate brochures, mailshots, catalogues or advertising, remain suppressed, and the printing market has been plagued with over-supply. Much of the hit in profits came from exceptional costs of closing two factories in the US. This has retained costs, but only for the time being.

The slump in advertising has also hit St Ives' magazine printing division. Less advertising means fewer pages. So St Ives is trying to focus its efforts on printing time-sensitive magazines, such as the weekly titles Time Out and The Economist. With these publications, advertisers and editorial staff want to get the most up-to-date material into the magazine, which means leaving the printing process to the last minute.

St Ives can charge a high price for churning out magazines with tight deadlines, but its competitors are also turning their eyes to this niche market too, so St Ives is under pressure to keep up its margins in this area.

While business is a little brighter in its books division - it prints JK Rowling's best-selling Harry Potter series - the company also warned of higher utility costs. Its electricity bills have already shot up and its gas bills are also likely to rise, adding more than £1m to its cost base. Costs remain under extreme pressure, and with no sign of an upturn in the underlying market, the shares don't look like they will be so hot off the press. Avoid.

Financial services focus may pay off at Microgen

Microgen, the information technology services group, updated the market yesterday on its third-quarter performance and produced a pleasing progress report.

Its house broker, UBS, has a price target of 80p - a 40 per cent premium to yesterday's price of 57.5p. With a free float of 70 per cent this is not an overly illiquid stock so what chance is there that investors will see a near doubling of the share?

First the company is well managed. Martyn Ratcliffe, the chief executive, has been there six years having been head of Dell Computers in Europe previously. The company's software is used to run billing, pricing and payments systems. It supplies IT solutions for integrating computer systems within organisations and has a consultancy practice too. One key industry it supplies is the financial services business, a sector that has been on the ropes recently. However, Microgen's services are as much about integration and improved efficiency, including addressing the increased regulatory burden, as supporting the trading activities of banks. Its acquisition of AFA Systems for £8.7m boosted its position in financial services which now accounts for one-third of its business.

Yesterday's update showed net free cash at the end of September was £11.7m, up from £9.1m three months before. The market "continues to be unpredictable" says the company but it is confident that full-year results, stripping out AFA, will beat expectations. Its shares rose 6.5 per cent yesterday.

The company trades on a current year price-earnings multiple of 16.5 times, bang on its peer group average, so hardly extravagantly valued. Buy.

Designer Marchpole is one for brave fashionistas

Marchpole Holdings, the clothing designer that operates the license for the Yves Saint Laurent menswear brand, has a history more chequered than the lining of some of its jackets. It floated in 1997 to much fanfare, but within a year its shares crashed. Orders were missed, margins collapsed, sales dropped, operating losses appeared and directors left.

But Marchpole, under new management since 2002, has turned around its performance. Its YSL license expires in 2007, but Marchpole now designs for Oswald Boateng, the upmarket French label Jean-Charles de Castelbajac, and also Emanuel Ungaro. Its team of designers produces the range, which is shown to retailers. They select what they want, and Marchpole orders the items to be manufactured. This means it has low fixed costs and little stock overhang risk. Its labels are proving resilient to any signs of a slowdown in consumer spending and the group said in a trading statement yesterday that its order book for the summer collection for YSL and Boateng labels is 15 per cent ahead of last year.

As Marchpole builds strong sales growth and profitability, it has started to become more fashionable again. Its shares have more than quadrupled this year on the back of recent acquisitions. Now at 34.5p, it trades at more than 13 times 2005 forecasts. Still, a daring buy.

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