Investment Column: 3i is recovering – so buy if you feel brave
Evolution; Moss Bros
Friday 26 March 2010
Our view: Tentative buy
Share price: 296.5p (+4.4p)
The recession was hard on 3i Group, Britain's largest listed private equity company. The share price plunged almost 86 per cent from pre-crunch levels to below 130p at its nadir at the start of last year, as debt-fuelled buyouts of companies were put on ice. Boss Philip Yea was ousted and the group had to call on investors for cash as it sought to slash its £2bn debt pile.
Since those dark days, however, business has perked up for a company whose multifarious investments include underwear chain Agent Provocateur and the Ministry of Sound entertainment business.
While management is not yet hailing a return to the boom times, the mood has perceptibly lightened as Mr Yea's replacement, Michael Queen, unveiled the company's pre-close update yesterday. To mark the new-found confidence, 3i announced it had closed its €1.2bn growth capital fund for investing across Europe, Asia and North America. 3i is pumping in €800m with the balance coming from external investors. The fund has already made its first investment – a 20 per cent stake in fruit juice maker Refresco.
In general, belt tightening is still the order of the day – the group invested just £311m in the 11 months to the end of February, compared with £898m the previous year. Management says the group has also reduced debt by a further £115m to £528m. And Mr Queen says business performance continues to improve, prompting analysts from Evolution Securities to upgrade expectations for realisations by £100m. The analysts are waiting until March's numbers are out before looking at the net asset value of the portfolio, but there should be further room for share price growth as the performance of 3i portfolio companies improves with the wider economy. The question is how much. Still, we're tentative buyers.
Our view: Hold for now
Share price: 119.88p (Unchanged)
On the surface, the markets seem upbeat. Look deeper, however, and it becomes clear that investors remain nervous. The world didn't end when Lehman Brothers went to the wall. But it did change. The banks were the first to be humbled and now it seems to be governments, with the credit markets crying foul over sovereign debt. Talk to traders and the nerves become apparent.
Given this uncertain backdrop, you'd think that a company like Evolution would remain cautious. But its chief executive, Alex Snow, appears upbeat, even bullish. His view is that the prevailing uncertainty "only goes to underpin the long-term stability that markets require to operate more effectively" and he wants to increase Evolution's risk appetite and potential returns. Good idea? Up to a point. Evolution has kept a leash on costs and has a solid balance sheet. It probably stands to benefit from a crackdown on bigger players. But then again, new rules and regulations may not prove as beneficial to it as some may hope.
The shares trade on a multiple of 13.3 times Arden Partners' full-year estimates, with the market seemingly ignoring the upside. But, given the uncertainties in Evolution's space, it's not as generous as it appears on the surface.
The shares have rallied recently and while they could look cheap this time next year, they could very easily go the other way. If you have some, it's probably worth holding to see how the market plays out but don't buy in at this time. Just hold on for now and sell on strength.
Our view: Speculative buy
Share price: 22p (+1.5p)
The menswear retailer Moss Bros has been quick out of the blocks during the seven weeks since its financial year ended on 30 January 2010.
The group behind the eponymous suit hire business and the Moss fascia boasted a 15 per cent jump in underlying sales, partly driven by the changes it has made to its product offer, such as the introduction of shoes, new brands and larger suit sizes.
It also touted a healthy rise of 1.8 per cent in gross margins for the 52 weeks. However, Moss Bros did not pay a dividend again and it was unable to give a clear signal of when the payout to shareholders might return. The retailer also made an adjusted pre-tax loss for the second year running, although the deficit of £3.9m was an improvement on the previous period.
The darkening clouds over the retail sector after the general election should serve as a further warning for investors. But given the company's strong balance sheet, and the problems faced by its rival Suits You, we reckon that, at just 22p, Moss Bros shares are worth a punt for those feeling brave and willing to take a long-term view. For investors with an appetite for risk, we rate the shares as a Speculative Buy.
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