The Investment Column: Hold on to Pearson as improving fortunes for FT boost prospects

Software group Northgate still a buy - A&L vulnerable to fears of slowdown
Click to follow
The Independent Online

Pearson really cannot afford any more hiccups, so it was a relief for investors in the publishing group that last week's trading update contained no new bad news.

Pearson really cannot afford any more hiccups, so it was a relief for investors in the publishing group that last week's trading update contained no new bad news.

There is a campaign under way - mostly coming from rivals - to try to bounce the company into selling its Financial Times newspaper asset, which, some say, is under-performing and poorly managed.

Last year, performance at Pearson's Penguin consumer books business was hit badly by two separate sets of problems. And, in its dominant US educational publishing (textbooks) business, 2004 was a quiet year.

The three parts of the group ought to do much better in 2005, though Penguin remains a concern and the FT is hoping only to break even - after three years of losses.

In a trading update issued on Friday with its annual general meeting, Pearson said the anticipated sharp rebound in the US educational market had indeed kicked in. Top-line growth in education is forecast to be in double digits this year.

At the FT, ad revenues are up 3 per cent in the year so far and, if this is maintained, Pearson says the paper will break even. The FT Group within Pearson, which contains other business information assets, will of course remain respectably profitable.

The speculation about the future of the FT ought to recede in the coming months, both because its performance has improved and the company made it clear during its AGM that the paper is not for sale.

Pearson deserves credit for investing in the FT and exploiting its global brand by launching US and Asian editions. In the face of large losses in recent years, other media groups may have been much more timid. However, Pearson has not been nearly as aggressive as it should have been in using the FT brand to create a related sizeable conferences and training business.

At Penguin, the business seems to have got over its UK distribution problems but the US mass market remains difficult. Penguin sales are seen falling about 2 per cent overall in 2005. Pearson shares, at 637.5p, are supported by a 4.3 per cent dividend yield, making the stock a hold.

Software group Northgate still a buy

Northgate Information Solutions is the UK's biggest supplier of payroll and related software to personnel departments. Its shares have been stuck in a narrow trading range for the past 18 months but could be due to break out.

All eyes will be on its annual results for the 12 months to 30 April, which will be published at the end of June. The company issued a year-end trading update yesterday which, although short on detail, keeps us optimistic for its prospects. Chris Stone, the chief executive, said Northgate had performed well in the second half of the year across all its operations and trading was in line with the guidance given six months ago at its interim results.

Back in November we said the shares were conservatively valued at 67p, giving a current year price-earnings ratio of 15 times. Looking ahead, the p-e ratio for the year to 30 April 2006 falls to an even more modest 12.4 times but yesterday's closing price of 68p shows the market is still waiting for more detail before giving the shares their next boost.

Northgate's personnel software has a strong position among large and small companies - it has 7,500 corporate customers in total and supplies more than half of the FTSE 100. It also has a strong position with local authorities and police forces which use the company's software to improve their efficiency. Northgate is still a buy.

A&L vulnerable to fears of slowdown

Despite yesterday's upbeat trading update from Alliance & Leicester, this year could be a tough one for the mortgage bank.

Before its annual meeting last night, the group said it had made good progress in the first three months of the year. Gross mortgage lending was £1.5bn, with net lending of £350m, while gross unsecured personal lending totalled £890m.

That's an improvement from the fourth quarter when A&L's net mortgage lending was nil. However, it is still losing market share - its slice of the net mortgage lending market has shrunk from 2.4 per cent last year to 2 per cent now. In February, the bank warned of a further slowdown in the lending market and tighter profit margins this year.

Things are bound to get even tougher for the Leicester-based group as the housing market continues to cool and the consumer debt-fuelled spending boom has come to an end. Revenue growth at A&L has also been held back by its insistence on good quality lending - dubbed a "holier than thou" approach - which has made it harder for the bank to increase income as fast as its rivals, but now is not the time to slacken credit criteria.

A&L is desperately trying to slash costs - it closed about 50 branches last year and is encouraging customers to use the internet. It also cut the pay of its top four executives last year. Richard Pym, the chief executive, was the only director of the four to get a pay increase, of 3 per cent, but saw his bonus drop 11 per cent to £428,000.

Banks focusing almost entirely on the UK retail market are higher risk now that consumers are tightening their belts. At 828p, A&L is a sell.

Comments