The Investment Column: Northgate's rejection of its suitors is a good sign

Lonmin; Sheffield United
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The Independent Online

Our view: Buy

Share price: 82.5p (-11p)

Northgate Information Solutions has become the latest UK technology company to reveal that talks with potential private equity buyers have fallen through. Negotiations earlier this year to take Computacenter and Misys private also came to nothing. At Northgate it appears that the private equity consortium that approached the company failed to pitch its bid high enough to tempt management.

Nevertheless, the investment case at the company remains solid and readers should not be surprised if another offer for the group soon emerges, given its strong cash generation, recurring revenue stream and leading market position in a number of areas.

Northgate's education division offers significant growth upside but its core business in human resource outsourcing and public sector IT services are the real drivers for the business. Northgate processes one in three UK workers' salaries and is the market leader in that segment. Meanwhile, the company's government applications unit fields around 90 per cent of 999 calls made to the police. Analysts expect Northgate to shake off the effect of the failed bid talks by making a few small acquisitions of its own over the coming months to further strengthen its position in its core markets.

At present, it trades at a good discount to peers. Meanwhile, Chris Stone, Northgate's chief executive, has turned down high-profile jobs at Misys and troubled healthcare software developer iSoft since he took over Northgate and has now turned away potential private equity interest. That should be taken as a sign that the company's impressive growth profile remains very much intact.

Lonmin

Our view: Buy

Share price: 2,907p (+58)

Lonmin, the rump of late tycoon Tiny Rowland's African mining empire, is firing on all cylinders. Yesterday it posted a solid set of production figures. Platinum output in the year to the end of September reached a record 1,017,000 ounces, ahead of the group's 1 million ounce target.

But, there were a few words of caution from the group's chief executive, Brad Mills. He warned that Lonmin may struggle to contain costs in the year ahead due to rising wages rise.

Nevertheless, Lonmin, which is based in South Africa and is the world's third biggest platinum producer, saw its shares gain ground yesterday. The stock now stands above the level seen in the wake of February's bid approach. Analysts believe behind this strength in the shares is a conviction that Lonmin's days as an independent player are numbered.

Anglo Platinum and Impala, the world's largest and second biggest platinum producers, are likely to struggle to win control of the group because of competition concerns. However, there is nothing to stop Canada's Barrick Gold or South Africa's Gold Fields buying the group.

Sheffield United

Our view: Only for the brave

Share price: 13.25p (+1p)

Investing in football clubs has long been a pastime for those more interested in spending money than making it. Sheffield United's final results yesterday showed why. The football club may have moved into the promised land of the Premiership but it paid a heavy price for doing so.

Full year losses for the year ending 30 June soared to £7.7m from £1.2m as the Blades splashed out on building a squad capable of winning promotion.

It duly did, but the company's financial prospects now depend on being able to stay in the top flight, and that will not be easy.

So far the Blades have spent more than either of the other promoted clubs, Watford and Reading, with that aim in mind and Kevin McCabe, chairman, indicated that yet more cash could be splashed out in the January transfer window "if necessary".

But while the ability to spend on players is always useful, it does not guarantee success on the pitch and the Blades have been struggling.

To be fair to Sheffield United's board, much effort has been expended into diversifying the club's revenue away from just football into property and leisure. Despite its losses, the company is in relatively good health financially, particularly when compared to many of its peers. If the football team can stay up, next year the Blades will benefit from enhanced TV income from the Premier League's broadcast rights deals with Sky and Setanta.

The shares shot up in the midst of the promotion winning campaign, but have fallen back since then. They should rise again if the Blades look like staying in the Premiership, but that's a big if. Only for the brave or foolhardy.

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