The Investment Column: There's enough good news in Reuters to justify holding the stock

Rank Group; Tribal Group
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The Independent Online

Our view: Hold

Share price: 400.25p (+1.75p)

At one point in recent years, it looked as if the Reuters business was in freefall. The financial news and information giant's share price sank as low as 95p in March 2003.

Yesterday's trading update showed how far the company has come under the tough medicine administered by chief executive Tom Glocer, together with a (limited) recovery in its markets.

Reuters reported that underlying revenue growth of 4 per cent was seen in the first quarter of 2006. The group only moved into positive territory in the second quarter of last year - for the first time since 2001. The company provides data, news, technology and electronic trading infrastructure to banks and other players in the financial services sector.

According to Reuters, its market share grew one percentage point in 2005, to 27 per cent, drawing it level with chief rival Bloomberg. The company has given guidance that 2006 will see 5 per cent growth overall, but many in the City believe it will better that.

The existing business is coming along well and we are now really starting to see benefits from a set of initiatives called Core Plus, which seek to add new business streams. These should deliver an extra 3 percentage points to growth by 2008. A solid hold.

Rank Group

Our view: Buy

Share price: 226p (+0.5p)

Rank's stock market value must be getting close to the point where private equity firms would be interested in making a move on the owner of Hard Rock cafés, Mecca Bingo and Grosvernor casinos. The leisure conglomerate's shares are pretty much where they were just before the Iraq war, when the market was in the doldrums.

Certainly if Rank carries on issuing trading statements like the one it put out yesterday, the stock is unlikely to be stirred. The group complained that its profits were under pressure from rising business costs, including energy, and changes to the taxation of its gaming machines, leaving another slew of downgrades to the group's earnings forecasts looking likely.

However, these are short-term considerations. Private equity firms tend to think on three to five-year time horizons and are unlikely to be concerned by a few quarters of weak earnings. They look for companies where there is plenty of value to be generated by a restructuring of the business and its balance sheet.

There is plenty of room for both at Rank. The sale of the US holidays operation and other non-core assets would immediately realise cash. As would a reduction in the company's capital spending and a sale and leaseback of freehold property.

Analysts believe a private equity firm could easily afford to pay 275p a share for Rank - a valuation in line with that paid by Permira for Gala Bingo. And a prospective financial buyer need not look far for a management team to handle the reform process. Ian Burke, Rank's new chief executive, is already very familiar with the workings of private equity buyouts, having been installed at Holmes Place after it was acquired by Bridgepoint Capital and Permira. The very real possibility of a bid for Rank makes its shares a buy at current levels.

Tribal Group

Our view: Hold

Share price: 222p (+7.25p)

Yesterday's trading statement from Tribal Group pretty much confirmed that the recovery in the support services group is now complete. Not only was management "increasingly confident" about the company's future, but also there were tangible signs of Tribal's renaissance. It has made serious inroads towards reducing its debt pile - which stands at £78m, well below most analyst expectations.

Outwardly, Tribal is not the most interesting company in the world. It offers support services to the public sector. The activities span a wide range from public relations and recruitment to architectural advice and providing school inspectors. The business was built up quickly by a series of acquisitions. However, these were not properly integrated and the whole process was brought to a halt by a series of profit warnings.

Tribal is now firmly focused on consolidating its various businesses and on organic growth. Securing further contracts to operate new NHS treatment centres will be key for the continued rise in the shares in the coming months (they have pretty much doubled in the last 12 months). The Department of Health is currently engaged in Wave 2 of its treatment centre procurement programme. Tribal yesterday confirmed that it has been shortlisted for a number of these. Given its performance in Wave 1 - when it delivered centres on time and on budget - there is a very good change the company will be successful in Wave 2.

Tribal stock trades at about 13 times forward earnings while the wider support services sector trades at 18 times. Normally this discount would be a buy signal but given the difficulties the company has had in recent years it is probably justified. At 222p, the shares are just a hold.

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