The Investment Column: Paragon is worth holding, despite house price jitters

FishWorks; Eros International
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The Independent Online

Our view: Hold

Share price: 666p (-8.5p)

Paragon, the lender to landlords, could not have picked a worse day to report its full year results. On their way into work City investors read the gloomy prognosis on house prices from the Morgan Stanley economics guru David Miles. When they got there they will have seen a depressing trading statement from another lender, Kensington, whose shares promptly fell out of bed.

Paragon shares got caught in the backwash, falling as much as 8 per cent at one point. However, they had regained almost all their losses by the end of the day when people had woken up to the fact that Paragon's results were pretty good.

New mortgage completions were up a staggering 82 per cent, while pre-tax profits were up 15 per cent. Yes, there were a couple of one-off gains in there flattering the figures, but the results were good even when these were stripped out.

Credit quality was also strong, with the impairment charge increasing by just 10 per cent - a drop in the ocean given that the number of loans the company advances is growing much, much faster.

The chief executive, Nigel Terrington, reckons there is still plenty of growth in the market. He says just 30 per cent of buy to let landlords have a mortgage on their second or third properties. That means 70 per cent do not, and if more of them can be prepared to do business with Paragon, growth will continue to be rosy.

You could almost believe there were no clouds on the horizon. Except there are, namely the mounting concerns about the housing market.

Mr Terrington points out that the economy is much stronger than when the last crash occurred in the 1990s.

Then, interest rates briefly touched 15 per cent while unemployment was running at over 3 million. Now, while rising, they still only sit at 5 per cent while the unemployment rate is less than half what is was then.

Paragon trades at 12.6 times forward earnings and its shares yield a prospective 3 per cent. Given the growth the company has been showing, that is not overly expensive. Despite the housing market concerns, the shares are worth holding.


Our view: Avoid

Share price: 36.5p (-12p)

Making money from fish restaurants is not an easy business. The collapse of Tony Allan's Fish! a few years ago showed this. FishWorks yesterday once again reminded investors of this fact. It issued a profit warning, telling the City to expect profits of just £750,000 in 2007, a 65 per cent reduction on its previous forecast.

So what has gone wrong? It seems that the company has expanded too quickly. In the past nine months, FishWorks has doubled the number of its restaurants, predominantly in London, to 12. However, the service at some of the new outlets has not been up to the group's usually high standard and as a result sales have been week.

Mitchell Tonks, the group's founder and chief executive, has put plans for further expansion on ice and is now focused on fixing the problems at underperforming sites. This is likely to take until the summer and see him invest heavily in training staff.

At its best, FishWorks is a great place to eat. Because it controls every part of the process from when the fish come off the boats to it being served at the table, it can offer truly fresh fish at reasonable prices. However, from an investment point of view, the company is much less appetising. Running a restaurant is a tough business and operating a fish one is particularly so. If readers are going to put their money into the sector, they should back chains that offer food that is quick and easy to serve up such as pizza, pasta or burgers.

FishWorks certainly does not fall into this category. Go to the group's restaurants, but avoid its shares.

Eros International

Our view: Buy

Share price: 261p (+6p)

Eros International, the Indian distributor of Bollywood films in the West, yesterday posted an outstanding set of maiden results. First half profits at the AIM listed group doubled to £4.6m while revenues jumped 48 per cent to £11m as it moved into the movie making business for the first time in its 30-year history.

Eros co-produced one film during the first half of its financial year, an Indian version of Shakespeare's Othello, and plans many more in the future.

Now is a great time for the company to be moving into the Indian movie-making business and analysts expect it to be the key driver of near-term growth. The number of cinemas in the country is expected to soar as tens of millions join the ranks of the middle classes on an annual basis. Over 3 billion cinema tickets were sold in India last year alone.

Eros shares listed in July at 176p and have risen by 50 per cent since. Yet, even after this advance, the stock trades at only 15 times forecast earnings for the year to March 2007. For a company with Eros' growth potential, this is too low.