The Investment Column: St Modwen denied chance to join REITs bandwagon

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The Independent Online

Our view: Hold

Share price: 585p (-5p)

St Modwen Properties would love to be able to convert to a Real Estate Investment Trust and enjoy the tax breaks the status offers, but as a property developer the current rules do not allow it to join the club. Nevertheless, that did not stop the group from posting a stellar set of full-year results yesterday.

The figures revealed a 17 per cent rise in pre-tax profits to £96m, allowing St Modwen to lift its total dividend by 16 per cent to 10.2p a share. Its net asset value grew by 20 per cent to 323p a share in the 12 months to the end of November and, according to Bill Oliver, the chief executive, there is plenty more for shareholders to look forward to. In the past five years, St Modwen's net asset value has doubled and Mr Oliver is convinced the company can pull off the same trick in the next five.

St Modwen specialises in town centre regeneration projects and brownfield sites. Among the high-profile schemes it is involved with is the £1.5bn redevelopment of the Elephant & Castle site in London and the former MG Rover site in Longbridge, Birmingham. From an investment point of view, the group finds itself in the enviable position of not having to go out and buy any more land in order to achieve its target of doubling in size in the years to 2011. This, combined with the stable economic conditions in the UK and buoyant demand for both residential and commercial property, should see Mr Oliver meet his forecast.

Royalblue

Our view: Buy

Share price: 1,070p (-17p)

There are few software players like Royalblue. Not only does it boast an outstanding growth rate, but it also has stable and predictable cashflows. That is rare in the software sector.

Yes, many players in the industry are exposed to exciting markets, but most make their money from selling licences for their software. These are one-off payments and mean it is difficult to make any forecasts for the future. The result is a very bumpy ride for investors as famine usually follows the feats of a few licence wins.

There are no such problems at Royalblue. The company provides software to investment banks and stockbrokers which helps them trade shares and settle those transactions. It can also help financial institutions properly manage their risk exposure to stock markets. As opposed to getting a licence fee, the group charges fees depending on how sophisticated are the services it offers to its clients. As a consequence, more than 70 per cent of its revenues are recurring.

Given stock markets around the globe are booming, it is no surprise to see Royalblue firing on all cylinders. Yesterday it reported a 27 per cent rise in annual pre-tax profits to £14.3m on sales of £94m. The group's development of new products also supported this performance.

Of course, when the stock market boom turns to bust (as inevitably it will one day) Royalblue will suffer. But investors should not worry about a collapse in its profitability. During equity markets' dark days of 2002/2003, the group suffered a decline in profits of only 30 per cent.

On a long-term view, its performance has been first class. Since listing in 1997, it has delivered compound sales growth of 20 per cent per annum and has never disappointed investors with a profit warning. The fact that it does not need to make any major acquisitions - which are always risky - in order to continue growing at the current rate is an added bonus for investors.

As with everything in this world, this comes at a price. Royalblue stock trades at a 40 per cent premium to the wider software sector. But, given its track record of delivering growth, this is a price worth paying. Meanwhile, the possibility of the group being taken over by a rival like Reuters or SunGard of the US acts as icing on the cake.

Internet Business Group

Our view: Buy

Share price: 31.5p (+0.5p)

Internet Business Group (IBG) connects advertisers with online publishers. In return for this service, it gets a cut of the revenues generated by each advertisement it brokers. Yesterday's results from the AIM-listed group show business is booming.

IBG posted a leap in annual pre-tax profits to £1.2m from £413,000. The group also said the start of its new financial year has been strong. Why is IBG doing so well? Quite simply because the market for internet advertising is growing at around 30 per cent a year.

At present, there is a huge disparity between the time people spend online and the proportion of advertising budgets devoted to the internet. And this disparity looks set to widen as traditional forms of media like newspapers and television continue to suffer declines.

IBG is among a handful of London-listed operators that are benefiting from the growth in internet advertising - a trend that is unlikely to let up any time soon. Brokers expect profits at the group to rise to £1.9m in the current year and hit £3.1m by 2008. With this growth in mind, the 23 times forward earnings at which the stock trades is not excessive. In fact, relative to IBG's international rivals, it represents a discount.

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