The Investment Column: Last of the British merchant banks looks a bargain

Christian Salvesen; Raymarine
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The Independent Online

Our view: Buy

Current price: 734p

Perhaps it is no wonder that a company best-known for making markets in equities should be among the biggest casualties of the summer sell-off, and shares in Close Brothers are more than 30 per cent off their high. But there is much more to Close Brothers than just Winterfloods, and now might be the time to pick up a bargain.

Close Brothers is an independent UK merchant bank, and given the foreign dominance of the London markets also arguably the last. Apart from market-making, it also runs investment management, corporate finance and wealth management divisions.

Yesterday's acquisition of a 49 per cent stake in Mako, a fixed income derivatives group, is a new string in diversifying Close Brothers' portfolio of businesses. Although financial details of the deal were not revealed, global growth in exchange traded derivatives, in which Mako specialises, has been running at about 30 per cent since 2000. Mako trades lower risk derivatives - exchange raded rather than over the counter - reducing its counterparty risk without limiting its growth potential.

Investors tend to focus on the market-making business because Winterfloods is such a well-known name in the London market. That said, it is the largest part of the group, and when markets head south there is little that Close Brothers can do about it - profits dived when the markets went into a three-year bear run on the back of the dot.com bubble.

Even so, the market correction global equity markets are experiencing is unlikely to lead to the FTSE 100 dipping below 3,400 again. Investment and wealth management should have a good year and once again, provided we are not on the verge of a major economic downturn, there should be no reason why Close Brothers cannot hit its full-year earnings targets.

This is very much a play on the markets, but Close Brothers has very little exposure to mortgage credit and the shares trade on an undemanding 8.9 times forecast 2008 earnings, yielding 4.4 per cent. For investors looking to pick up a solid, diversified financial growth stock at a decent price, the recent sell-off makes Close Brothers look very attractive. Buy.

Christian Salvesen

Our view: Sell

Current price: 56p

Just about every business in the UK seems to be blaming the weather for some shortfall or other. Yesterday it was the turn of the logistics and transportation group Christian Salvesen, as it warned that worse vegetable crops would hit the first-half performance of its UK division.

Christian Salvesen manages logistics and transportation for a variety of industries, not just food but also clothing, building products and aviation. The market took yesterday's news rather well - but then again, the stock has been a long-term undeperformer. Despite the bull run since 2003, the shares are lower now than when the wider market hit its low point.

News on the weather-affected first half was partly offset by news that the company has sold three of its UK food transport plants to the Dutch group Pinguin for an eventual £17.2m in cash. That looks like a good price, but the fact that Salvesen believes that the plants can do better under someone else's ownership tells its own story.

Christian Salvesen's earnings are weighted towards the second half and the company also told investors that it remains comfortable with full-year estimates. Even so, there has to be a large element of doubt about management's ability to deliver when the weather, something over which it has zero control, shows no sign of improving. The results of a long-overdue strategy review will not be made implemented until later in the year at the earliest and will not affect results until 2009.

Despite the poor performance of the past few years, the shares still trade on 14.4 times forecast 2008 earnings - and that looks too expensive. Barring a private equity bid, which looks highly unlikely, investors should bite the bullet and look elsewhere. Sell.

Raymarine

Our view: Hold

Current price: 260p

Raymarine, the designer and manufacturer of electronics for the leisure yachting industry, has been one of the top performers in the small caps since it came to the market late in 2005. But yesterday's warning on US operations fully justified a 26.8 per cent fall in the share price.

Raymarine's product range, which includes radar, autopilots and navigation instruments, has made it the market leader in the medium-sized yacht category, with 23 per cent of the market. It has developed a strong brand name in the leisure boating world, but a strong brand name still needs to be managed well to deliver the goods.

Although the company reported a 13.8 per cent jump in interim pre-tax profit to £22m, with gross margins rising to 47.3 per cent, sales were below forecasts at £83.7m. However, most of the upside came about through acquisitions and a lower-than-expected tax charge.

It wasn't just the weak dollar that impacted US results, where sales fell 3 per cent. The company overstocked in late 2006 and as a result Raymarine has cut its 2008 estimates by a whopping 20 per cent. That isn't just bad luck, it's also poor judgement.

Management has got a lot of work to do - not just to make this year's numbers but also to regain lost credibility. Should Raymarine recover and make its 2008 forecasts, the shares trade on just 8 times earnings, but given the sharp decline in the US business, that is no gimme. However, this is still a growth business within a niche market - and with much of the downside probably now priced in, investors should hold on for now.

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