Poleaxed 3i looks worth a punt

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The Independent Online

If we are at the bottom of the bear market, then it is both the best of times and the worst of times for 3i Group, the venture capital giant. The value of its existing investments has plummeted, but it sees new bargains all around.

3i sows its investment in fledgling companies, reaps the fruits of the growth that results, and then takes its company to market. Yesterday it said it has wiped £1.2bn off the value of its portfolio and its net asset value per share, at 480p, is 24 per cent lower than last year, dragged down by technology investments made during the boom. The group has set aside £379m to prop up investee companies now in difficulty. The bear market has also made fundraising for buyout deals difficult as spare capital from potential partners is thin on the ground.

But public market valuations are still very depressed and companies are flogging off businesses on the cheap to reduce their debts. The recent flurry of takeover activity in the stock market also suggests that plenty of people see value at current levels. 3i has plenty of cash on its books, with a net inflow of £170m in the past year, and so can afford to take advantage. The group sold nearly £1bn of assets last year at 40 per cent above book value despite the collapse of merger activity. It was able to increase its dividend by 4 per cent.

3i will always be highly sensitive to market and economic movements. If the markets are depressed it finds it tougher to float or sell its investments and will get lower prices for them. And if the economy gets ropier, the chances of its investee companies falling into difficulties increases. Those of a nervous economic disposition will believe they could pick up 3i shares more cheaply later. And The Independent certainly called the bottom of the market far too early when it tipped the stock this time last year.

On the other hand, with public companies unable to take advantage of lowly valuations because of timid shareholders and crippling debts, 2003 and 2004 may turn out to be vintage years for private equity. It will take at least three years of steeled nerves to find out, but 3i could be in for a bumper harvest. Go on, have a punt.

High-debt Avon shows little room for a bounce

Still no sign of those weapons of mass destruction, but the certainty that there are some somewhere has helped Avon Rubber no end. The group is designing a new gas mask for the US military and is also hoping for similar business from the UK's Ministry of Defence, so there is the prospect of some big contracts a couple of years out.

Which is a godsend, since the group's other markets look flat or worse. The group, which famously used to make tyres but sold that business in the Nineties, makes an array of hi-tech rubber products including "flexitanks" for carrying liquids, skirts for hovercraft and milking machine suckers.

Most of all it makes hoses and vibration absorbers for cars, and this market is highly competitive. New supply contracts are being signed at ever-lower prices and Avon has done well to keep sales broadly flat, although it signalled yesterday that in North America in particular the second half of the year may be worse.

The group has closed a UK factory and moved production to low-cost countries such as the Czech Republic, Portugal and Mexico. Interim profits of £3.95m compared with a loss of £5.4m last time. But debt is high, cash is tight and – on balance – the shares, down 5.5p to 174p, look high enough.

New plant helps Viridian put power behind the dividend

Investors who took the opportunity of buying shares in Viridian, the Northern Ireland electricity group, this morning would be in line for a dividend representing 6 per cent of their investment this year. The group promises to raise the dividend by more than inflation for the next five years.

Much has changed in the 18 months since we last wrote on Viridian and told investors to sell out. The bottom came last June when a new price regime was agreed with Northern Ireland's regulator. Electricity bills will still be cut year on year, forcing Viridian to make cost savings if it is to grow profits, but the new five-year regime was much more benign than the regulator's negotiating stance had led the market to fear. Also new is Viridian's Huntsdown power plant in the Republic of Ireland, which went live in time for the winter. This has gone some, but not all, of the way to countering a shortage of generating capacity south of the border and should reap large rewards for Viridian. The group is expanding its supply business in the Republic too, now that the market is being opened up to competition, and there are lots of opportunities for growth in generation and supply.

Viridian also staunched losses in its ill-advised move into software services, with 200 jobs cut at the Sx3 division (which sells benefits and housing management software to local authorities), which now makes profits.

The shares, up 22.5p to 532.5p, may not generate big capital gains, but they will be a sparky performer for those investors looking for income.

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