Investment Column: Barclays is risky but could be very cheap

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The Independent Online


Our view: Buy

Share price: 359.5p (+7.75p)

Bob Diamond's bid for world domination continued apace yesterday, with the hire of Stefano Marsaglia from Rothschild to be chairman of Barclays' global financial institutions group. There is little doubt he will have been lured with an eye-popping package, but will shareholders reap the reward?

Well it's hard to argue with Mr Diamond's track record up to this point – his investment banking unit has been the key business driver for Barclays for several years now, and with the US assets of Lehman Brothers it is rapidly becoming a global force. The earnings that Barclays Capital is producing should help to see the bank through a difficult period when profits from retail banking will be thin on the ground as bad debts continue to rise. Fortunately, at least, corrective action on the credit card business was taken several years ago, so it is not causing the sort of problems one might have expected. Signs of a global recovery (if not a British recovery) should help.

Banks remain a very risky bet. It is desperately difficult to value their earnings with the economic outlook still uncertain and the regulatory outlook even more so, particularly in Barclays' case. Arguably, with politicians queuing up to take pot-shots at him, Mr Diamond's imperious dismissal of their concerns could do with being moderated. He should let the numbers speak for themselves. They are starting to tell a good story, after all.

While Barclays was not immune to the effects of the credit crunch, it is clearly in much better shape than either Lloyds TSB or Royal Bank of Scotland, and has not yet had to call on the taxpayer for any cash.

For what it's worth, Oriel Securities has Barclays on an adjusted multiple of just 5.3 times this year's forecast earnings, with a prospective yield of 1.4 per cent. If the regulators allow it to continue on its path and the economic recovery strengthens, that looks rather cheap. Excepting HSBC, Barclays is the quality play among Britain's banks at the moment. So, while the risks have to be considered carefully, we say buy.


Our view: Sell

Share price: 144.5p (-2.5p)

Kofax, the computer software and hardware company which describes its business as providing "document driven business process automation solutions", blamed yesterday's full-year results on adverse economic conditions which worsened as the year progressed.

Although turnover went up by 9 per cent to £186m, operating profit was down 16 per cent at £14.1m and pre-tax profits down 20 per cent at £13.9m. But the big news of the day was the $33m (£20m) cash acquisition of 170 Systems, a loss-making software company focused on invoice processing and accounts payable functions.

The deal, which Panmure Gordon describes as "not overpaying", will be earnings-neutral this year but accretive from next year. It is part of a strategy to expand the company's more profitable software business, which accounted for 57 per cent of last year's revenues. Kevin Ashton, an analyst at Canaccord Adams, predicts faster growth and margin up from 8 per cent into the teens as a result.

Kofax is tentatively positive on the state of the market. Reynolds Bish, the chief executive, says there was a notable stabilisation towards the end of the financial year, and the company remains solidly cash-generative with a strong balance sheet.

But with no dividend, predictions of mid-single digit revenue growth in the software business and flat revenues in the hardware business, we cannot be too optimistic.

With the shares trading on a price-earnings ratio of 10.6 times next year's earnings, Kofax is a sell.


Goals Soccer Centres

Our view: Buy

Share price: 209p (+16p)

Recession? What recession? Yesterday's interim results suggest that the Aim-listed Goals Soccer Centres has scored again. Pre-tax profits grew by 5 per cent to £3.9m, while same-site sales were up 1 per cent. It appears that downturn or no, Goals customers are reluctant to give up their weekly thrash around its five-a-side courts. Goals centres are springing up all over the place (33 are currently operating) and the company has stepped up its programme. Four open this year, with six planned for 2010.

It is also opening in the US next year – which isn't as mad as it sounds. The first site will be in LA, with large, football-loving Hispanic community and lots of female players. We were cautious six months ago, but if this is what the company can do in a recession ... At 14 times forecast full-year earnings and yielding 1 per cent, the shares are not cheap, but we're convinced. Buy.