The Investment Column: Pricey MFI may have recovered, but it is best left on the shelf

Huntsworth; Axon Group
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The Independent Online

Our view: Avoid

Share price: 98.75p (+0.25p)

At the tail end of last year, there was a real worry in the City that MFI Furniture might go to the wall. This concern only disappeared last month when the group sold off its heavily loss-making retail division for a nominal £1 to private equity.

In fact, things were so dire at the unit that MFI had to pay Merchant Equity Partners (MEP) £125m for taking the business off their hands, which included a £53m dowry, a conditional payment of £12m and £60m of customers deposits. The transformation of the company will be completed on Monday when MFI changes its name to Galiform.

All that is now left at MFI is the Howden Joinery business. It supplies builders and small manufacturers up and down the UK from 362 depots. Although not the sexiest business in the world, it is highly profitable and is forecasts by analysts to enjoy strong growth in the coming years. Management, led by Matthew Ingle, who set up Howden in 1995 and took over as chief executive of MFI in October last year, believes there is scope for 500 depots in the UK. It hopes to open 60 next year and 40 per annum thereafter.

Cazenove, the broker, expects MFI to make a pre-tax profit of £43m this year, rising to £49m in 2007 on sales of £662m and £728m respectively. This leaves the group's shares trading at 17 times next year's earnings. This is a bit pricey given that that the likes of Travis Perkins, a rival, are valued at just 12 times.


Our view: Buy

Share price: 89.75p (unch)

The acquisitions just keep on coming at Huntsworth, the international public relations company. Yesterday saw the group significantly increase its presence in central and eastern Europe via the purchase of Mmd Group. It operates in a total of 18 countries in the region.

The deal is worth up to £35m. Huntsworth will pay £7.2m in cash, £4.8m in shares and the rest in deferred payments - to be satisfied in cash and shares - depending on how the business performs. The AIM- listed group also unveiled the £10.7m purchase of Quiller Associates, a City financial PR firm, in a similarly structured deal. Quiller will be merged with the existing unit Hudson Sandler.

So what is the rationale behind having a collection of PR firms under one roof? First, it allows Huntsworth to provide corporations with what it calls "integrated services". Given its global presence, it claims to be able to provide clients a service in most parts of the world whether it be financial, consumer or public affairs PR. So if a Huntsworth firm is working on a financial PR project for a multinational in the UK, it can also offer the client the services of one of its sister firms elsewhere in the world.

Second, the group has one head office servicing all firms, which saves a lot of money. Third, Huntsworth's AIM listing gives it a great platform for consolidation - as with both of yesterday's deals, it can pay for acquisitions by issuing more of its own shares - and for creating share-based incentive schemes for staff.

That's how it works in theory. In practice, Huntsworth shares have performed poorly over the past two years and at 11 times forward earnings trade at a discount to its nearest rival, Chime Communications. This is unwarranted and offers investors an opportunity.

Axon Group

Our view: Buy

Share price: 532.5p (+21.5p)

Axon Group is one of the best-regarded technology stocks traded on the UK markets. The small IT services company's share price has consistently forged ahead since the 2002 tech downturn and the stock hit a five-year high yesterday after yet another bullish trading statement.

The company's progress is very likely to have caught the eye of bigger rivals in what is a fast-consolidating sector.

The private equity firm Blackstone's approach to buy the French IT services player Atos Origin has put the spotlight on the industry and niche players like Axon look increasingly attractive.

Axon provides consulting services to companies that use the SAP platform for critical IT functions. It aims to save costs for clients and to improve the efficiency of the SAP systems. Results from SAP yesterday showed third-quarter licence sales were ahead of expectations. This has knock-on effects for downstream vendors such as Axon.

Its trading update yesterday said that full-year profits would come in at around 10 per cent ahead of consensus expectations.

The upgrade comes only a month after Axon last reported results and had analysts scrambling to update their numbers. Altium Securities said that the group's "astonishing performance" meant it has upped its forecasts 13 times in the past 26 months.

Although the shares trade at a heady rating of 24 times projected earnings, Axon is firing on all cylinders and its momentum does not look like halting any time soon.