Investment Column: 3i proves it's better to be safe than sorry
Tullett Prebon; Clinton Cards
Friday 13 May 2011
Our view: Buy
Share price: 289.9p (+18.2p)
Yesterday's near 7 per cent jump in 3i shares was largely a sigh of relief after the private equity group failed to confirm the market's worst fears.
Back in early April, 3i's shares fell heavily when the company warned that strong performance at Northern European companies would be "materially offset" by a small number of companies, mainly in the UK. Coming amid a welter of gloomy economic news and profit warnings, that announcement put the market on guard for something very nasty with yesterday's full-year results.
As it was, the only big UK hit was the write down to zero of the £201m equity of Enterprise, 3i's fourth-biggest investment. Despite this, 3i's performance was encouraging. Net asset value (NAV) per share rose by more than 6 per cent to 351p and beat analysts' forecasts as the group's diversification away from the UK, now just 27 per cent of its holdings, paid off.
What's more, there were encouraging noises about the business pipeline. Investment rose sharply in the year to £719m from £386m. Realisations, while lower than in 2010, were at a higher uplift over opening value.
During the private equity boom, 3i was seen as being both dull and volatile. With the wider sector far less go-go, it now appears to have healthy growth prospects and a steadier business. Despite all this, the shares still trade at a hefty discount of about 26 per cent to broker Oriel Securities' NAV for September this year. We think this gap will be closed, either through a steady rerating or, perhaps, a takeover. Buy.
Our view: Buy
Share price: 393p (-24.5p)
Tullett Prebon tends to benefit in times of great volatility as the inter-dealer broker's clients will trade more frequently. After a disappointing trading update yesterday, it could do with some more of that this year.
In its interim management statement covering the year to the end of April, the company said the financial markets remain unsettled. While this was good for the first quarter, which matched the same period in 2010, activity dropped off in April.
Revenues were 3 per cent lower to £304m year on year, sending the shares down nearly 6 per cent. Yet management reaffirmed that its balance sheet remains strong, and it says it is well placed to match its proposed investments in hiring new talent.
The group is tackling its issues in the US. It brought in a new regional chief executive and chief operating officer and closed down six satellite offices in North America. Taking out the branch closures, and underlying sales were actually up for the period.
Tullett has also settled its action against BGC, after its arch rival raided the company for two senior directors and 10 former company brokers, although it is not disclosing the result. It continues to pursue legal action against BGC in the US.
While the numbers may have disappointed, the price of 9.8 times estimated full year earnings calculated by Charles Stanley analysts looks cheap. It trades at a discount to its peers and saw further weakness yesterday. Buy.
Our view: Hold
Share price: 17p (+o.5p)
There were no happy returns for Clinton Cards yesterday after the greetings card retailer said its decline in sales had accelerated. The group, which operates 802 Clintons and Birthdays stores, said trading in the 14 weeks to 8 May "continued to be a challenge". Underlying sales fell by 3 per cent over the 40-week period, compared with a 2.7 per cent dip in the first half.
While this is partly down to weak consumer spending, Clinton has been struggling for more than two years in a declining market where many shoppers either no longer purchase cards, send electronic versions or buy personalised ones online at specialists, such as Moonpig.
Still, Clinton will be offering a similar personalised service when it relaunches its website on Monday. It has also launched four redesigned stores over the past two weeks.
While shares in Clinton have tumbled since hitting 40p last June, they still trade on a 2012 earnings multiple of nearly 14, a premium to the sector. In addition, we still think Clinton has to shed substantial numbers of stores before we put a buy recommendation on its investment card. Hold.
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