Investment Column: Build up a holding in undervalued Carillion
Big Yellow; Lookers
Thursday 08 July 2010
Our view: Buy
Share price: 314.2p (+0.3p)
Carillion has been working to shed its traditional image as a construction company and accelerated the shift towards support services. The strategy appears to be paying dividends, at least according to yesterday's trading update.
In a statement, Carillion said that underlying earnings would likely be ahead for the first half of its financial year, offsetting the effects of its sales of businesses and investment in public-private partnership projects over the past year. The company's order book, together with probable orders, was unchanged at £19.5bn.
At the same time, Carillion added that the emergency Budget had not yet caused any particular problems and expects no "material" troubles from the cutbacks to the Building Schools for the Future programme, assuaging the worries some investors had.
In January, Carillion warned that it expected overall budgetary cuts of up to 30 per cent and said this would shrink its UK construction business by a third as a result. That is tough but actually pleased many in the market, who want to see the switch to support services accelerating at an even faster rate.
Analysts at Morgan Stanley believe that the group's earnings before interest, taxation and amortisation in the support services arm are likely to be ahead of forecasts, which rather explains why.
The shares have had a good run, say analysts at Panmure Gordon, but on a price of 8.1 times estimated full-year earnings they are hardly trading on a multiple that is stretched, particularly when set against some of company's support services peers. Serco, for example, is trading on closer to 16 times.
Carillion also has a 5 per cent dividend yield, which is not to be sniffed at. While economic uncertainties remain a worry for almost any business you care to consider, on valuation grounds alone Carillion appears to be worth an investment, so buy.
Our view: Hold
Share price: 305p (+0.2p)
Regular readers of this column will be familiar with our concerns about the recovery, which remains sluggish to say the least. So looking at a company like Big Yellow, our positive view of the company has to be balanced with our caution over the economy.
Big Yellow posted a healthy 10 per cent rise in first-quarter revenues from its 51 wholly owned stores yesterday. Forward visibility in the self storage trade is fairly limited, but as far as Big Yellow can tell, trading is likely to remain reasonable until the seasonal slowdown in September, when students move into halls and home movers have usually sorted out plans. Moreover, management has done a good job of managing the balance sheet, and the company seems strong enough to deal with any short-term pullback in the economy.
The problem will be if the pullback is sharper and the recovery is put off for longer than seems likely. This may hold back the share price as market sentiment, already anything but inspiring, turns more bearish. As Morgan Stanley points out, the stock could be hit hard in a double-dip scenario. But we wouldn't sell. Not just because of Big Yellow's strengths, but also because the stock trades at a significant discount to its March adjusted net asset value of 418p per share. Hold.
Our view: Hold
Share price: 47.5p (-0.75p)
okers, the car dealership, posted what by all accounts was a robust trading update yesterday, with investors being put on notice for "record" half-yearly results. The update followed some unexpectedly buoyant car market figures from the Society of Motor Manufacturers and Traders earlier in the week and suggested that car retailers in general – and Lookers in particular – are on the path to recovery. The question, then, is whether this upturn will last. We fell it could be rockier than some people might think.
The reason isn't Lookers, as a company. Our caution is down to the state of the economy again, which, while on the path to recovery, still only has one foot out of intensive care. The government is taking the axe to spending and retailers are among those who face the additional headwind of a rise in VAT next year. All this makes the forward picture uncertain, and we don't like buying into uncertainty. That said, the Lookers parts operation, which contributes a significant chunk of revenues, continues to deliver record results and looks set to remain resilient even if the economy suffers a double-dip downturn in the months ahead. There's also the valuation, which at 11 times Panmure Gordon's forecasts for 2011, is not at all demanding,. That's enough to hold the shares.
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