3i still worth buying into at current levels

N Brownÿs catalogue of challenges makes the shares a sell; Birmingham City will struggle to stay up
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The Independent Online

After agreeing the sale of the budget airline Go to easyJet for £374m yesterday, 3i is looking rather clever. But the venture capital group, which buys fledgling companies with a view to selling out later on, performed terribly last year.

3i's speciality is technology, so it was no surprise that yesterday's annual results showed the company making an appalling negative return of 19.3 per cent on shareholders' funds (its owners' assets were the company wound up) in the financial year to 31 March. Small wonder the stock has underperformed the FTSE All-Share by 35 per cent over the past 12 months.

It is for investors to decide whether wider economic factors only explain, rather than excuse, 3i's performance. The value of its investments is largely determined by the equity market, and valuations of smaller private companies are especially fragile in a downturn. Yet 3i has performed significantly better than the FTSE techMARK and Nasdaq indices, proof of the benefits of its diversification across different business sectors and geographical territories.

On paper at least, the worst appears to be behind the group. The second half of the year saw a positive return of £137m, after the first half's £1.1bn loss. Indeed, 3i believes now is a good time to invest. It is sufficiently confident in the economic outlook to be raising £300m to bolster its investment portfolio in the year ahead. Investors will also be reassured that after last year's surprise lay-offs and rationalisation – the first since the last recession – the group sees no need for any more cost-cutting.

That said, there is bound to be concern that with Punch Taverns pulling its float yesterday it will be some time before 3i reaps chunky profits from exiting its maturing investments via the stock market. Analysts reckon that at their current level, there is nothing in the valuation of the shares to imply that 3i will benefit from a recovery in the new issues market even in the medium term.

UBS Warburg estimates the current net asset value per share, after the sale of Go, is 680p. With the shares climbing 40p to 762p yesterday, the stock commands a premium over NAV of 12 per cent, close to its historic low. At the height of the technology boom, that premium touched 100 per cent, so it would not be foolish to assume most of the froth has been kicked out of shares now.

3i's own investment returns, and its shares, have delivered outperformance on a 5-year view even including the recent boom and bust. And stepping back, there can be little doubt that private equity will come to the fore once more if – or, as many are now saying, when – the global economy picks up.

New investors may have already missed the bottom, but that should not deter them from piling in enthusiastically at these levels.

N Brownÿs catalogue of challenges makes the shares a sell

Women are changing shape. There is a national audit going on right now to find out how much curvier, or otherwise, they have become since the last "size survey" in the mid-Nineties. N Brown is taking part, since it needs to know where to put the "pinch points" in its garments for the larger lady.

N Brown is one of the UK's largest mail order retailers, with a variety of catalogue brands aimed mainly at older and larger customers. And it has grown fat on the boom in consumer spending. Sales in the year to the start of March leapt 14 per cent, much greater than the gains made by high street stores. N Brown's pre-tax profits were £58.5m, up 12 per cent.

Part of its outperformance is down to a necessary obsession with finding out what its 2 million-strong customer base wants – and can fit into. It has made efforts to encourage customers to take personal loans from its financial services division, and thinks loans will total £30m to £40m this year. A move into homewares and electrical goods is also paying off.

Not all is sweetness, though. Its web design business looks like losing money again this year, despite plans to merge it with the fulfilment division, which itself is yet to move decisively into profit.

The group continues to rule out a merger with its rival Littlewoods, from where Alan White will move to take over as N Brown's chief executive later this year. Instead, the focus will be on reaching younger (that is, thirtysomething) customers and battening down the hatches for a period of slower growth.

The shares slipped 4.5p to 244p on news that sales growth since 3 March has fallen to 6 per cent.

Mail order retailers will no doubt prove themselves to be fleeter of foot than their high street rivals if things do continue to deteriorate. They don't have the overheads of those with a portfolio of high street stores. But it is clear that the the home shopping market's turnover is just as sensitive to consumer trends.

The growth in prospect does not justify the shares' prospective price-earnings multiple of 16. Sell.

Birmingham City will struggle to stay up

Birmingham City's fans may be, as they say, over the moon, but the football club's shareholders could yet find themselves with the Blues.

The club's triumphant return to the top flight, after winning a thrilling First Division play-off against Norwich on Sunday, is likely to prove only a mixed financial blessing. Premiership status confers an immediate £25m in extra annual revenue, what with higher gate receipts, sponsorship, and a share in the television rights deal.

The trouble is that getting into the Premiership has cost a lot of money – and staying there is likely to cost a lot more.

Birmingham City presented its financial results to the City yesterday, showing a £1m half-year loss, versus a £1.2m profit last time. David Sullivan, its chairman, put that down to increasing staff costs, including new player contracts and the appointment of Steve Bruce as manager.

The second half of the financial year will reap the benefits of the play-offs ticket sales and the start of the new season, but even that is unlikely to outstrip the effect of last year's run in the Worthington Cup.

Already yesterday there was a warning that shareholders are unlikely to feel the benefit of the Premiership money. Summer transfer costs will have an impact. And players are getting big bonuses as a result of their success on securing promotion.

Players' wage inflation has eaten at the financial stability of the whole football sector in recent years, bringing many clubs to the point of bankruptcy. But the pressure to break the bank for the top players is irresistible. The idea that football clubs should be run for the benefit of their shareholders would cause a riot on the terraces. Though 0.5p better at 23p yesterday, Birmingham City shares are not likely to stay up.

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