The Investment Column: Profit fears plague Homeserve after failed D&G bid

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The Independent Online

Our view: Sell

Share price: 1,704p (-54p)

Where does Homeserve go from here? The emergency repair group put out a trading statement yesterday confirming that earnings for the first six months of the year are on track.

However, after having lost out this month on a major acquisition, doubts linger in the City about how the company will continue to generate earnings and profits at the rate to which analysts have become accustomed.

Since the start of the year, its shares have lost 11 per cent. They have gained a bit of ground since the company lost a bidding war for Domestic & General, the provider of extended warranties for domestic appliances, this month. Advent International, the private equity firm, paid £524m for that company.

So the uncertainty about that deal, which had weighed heavily on Homeserve's stock for months, is now, at least, over. However, D&G did represent a new potential revenue stream for the business that has now disappeared.

On the upside, the weaker first half of the calendar year is behind Homeserve. The company should now see a sharp uptick in business; burst pipes and other household calamities naturally increase in the autumn and winter months. Because of this, the second half of the year represents about 75 per cent of group profits.

The company also unveiled yesterday a partnership with the insurance giant AXA, which removes underwriting risk for its UK policies and, if things go according to plan, is likely to add a bit on top of yearly profits. However, what the aborted Domestic & General deal implied was that the company needed to look outside the group to juice up future profits.

Homeserve is trading at 20 times the forecast 2007 earnings. Some analysts expect this ratio to fall next year, and now looks like a good time to take a break and watch Homeserve's next move unfold from the sidelines.



Invu

Our view: HoldShare price: 30p(Unchanged)

Document-management software may sound somewhat prosaic compared to the hi-tech gizmo end of the technology market.

However, it is a fast-growing sector, and Invu is one of the better-known providers of systems to aggregate and order documents and other types of information within an organisation. It targets small and mid-sized companies, and achieves a gross margin of well over 90 per cent.

The company has had a rocky ride over the past year, with a series of technical glitches around the introduction of the Series 6 upgrade of its software, a problem that triggered a disappointing trading statement in August.

Its results for the first half have proved very strong, however, with revenue up 19 per cent to £2.5m and a strong order book after signing up 311 customers. Despite losing £200,000 during the half as a result of increased sales and marketing spend, analysts were impressed yesterday that the company had addressed its technical issues in a timely manner.

The more bullish among those scribes argue that Invu should sit on a premium rating compared to its peers, and that a recent fund raising and reorganisation of its shares should see its stock heading back towards the 40p level and beyond.

Invu's share chart over the past six months has been something of a roller-coaster ride, and investors should be wary of betting the form before there is some solid evidence that the predicted upturn is on the way. Hold on to Invu shares for now.



Coffee Republic

Our View: Buy

Current price: 2.8p (+ 0.1p)

Investors could be forgiven for running a mile at the mere mention of the name Coffee Republic. The company has, after all, spent 12 years charging two quid for a cappuccino and yet failed to make money out of it.

Those with an appetite for a punt might care to take a fresh look at the company. Yesterday, it announced a franchising deal with Paris Group, a major retailer operator in the Gulf, which will see the company's shops springing up in many of the more exciting parts of that booming region such as the United Arab Emirates, Bahrain, Qatar and Oman.

Franchising is new chief executive Steven Bartlett's prescription for what has been ailing this company, which has long struggled against the other chains in the UK. And the deal with Paris looks a good one. It gives the company an upfront fee, royalty payments, and, crucially, full brand approval.

Bartlett says more are in the pipeline both in the UK and abroad and believes the company should go cash positive before too long. He will understand that investors – who have listened to sweet words from Coffee Republic and been burned before – might feel once bitten, twice shy.

To be fair, he put his money where his mouth is when the company tapped the market for £1m in March, and he might have found a formula to turn this long-time ugly duckling into a swan. Based on that, it is worth tucking a few of these shares away to see if he has. Buy.

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