Investment Column: Buy Aveva, even if the stock is losing pace

Greencore Group; Holidaybreak
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The Independent Online

Our view: Buy

Share price: 639.5p (+60.5p)

The engineering software group Aveva can be considered pretty lucky, given what has happened to most other companies in the last year.

Its chief executive Richard Longdon says the company was "going gangbusters" until just three months ago and the recession had hardly touched it. It is certainly reflected in the impressive full-year numbers announced yesterday: adjusted pre-tax profits were up 31 per cent to £62.6m and were ahead of most analysts' expectations, sending the shares up 10.5 per cent.

The more thoughtful investor may not have rushed headlong into the stock, however. The Cambridge-based group, which produces three-dimensional software used by ship, oil rig and nuclear power station designers, warned in April that "the global economic slowdown continues and the oil price and shipping rates sit at lower levels than in recent years, and some projects are now being postponed or cancelled, awaiting project funding or visibility of more certain times".

We fear the best time to buy was several months ago and investors may have missed out on the stock's biggest gains, even if it still trades at a 16 per cent discount to the wider software sector. Of course, there is an investment case. The company reckons it is in good shape for the future, despite softer markets, and that, on any measure, argues finance director, Paul Taylor expected earnings per share of 44p is a very decent performance. The business model of securing recurring revenues is a plus, as is the very strong balance sheet, which marks £126m of cash and, crucially, no debt.

Aveva is a good, solid group and those worried about keeping their equity safe should consider the company a decent punt. For that reason, and because we are still cautious, we are buyers of Aveva, but would caution that the gains made over the last few months may not be repeated. Buy.

Greencore Group

Our view: Hold for now

Share price: €1.04 (-11c)

At first glance you would run as far away from Greencore as possible. The Irish convenience foods group issued half-year results yesterday, with earnings down 18 per cent and operating profits off 11.7 per cent at €31.4m (£28m). As sure as night follows day, the stock took a battering, closing down 9.6 per cent. However, it really is not all bad. Greencore suffers from earning revenues and profits in sterling, but reporting in euros, which means that any fall in sterling has a negative translation on reported figures. On a constant currency basis, both the group's main arms, convenience foods and ingredients, saw profit gains. Add to this the near two-thirds rise in the stock over the last month, Greencore's US expansion plans and that it has all its debt refinanced for at least the next three years, and there is a strong investment case, insists its chief executive, Patrick Coveney.

Analysts at Investec argue that with the stock trading at a discount to its closest peer, it is a nailed-on buy. "If we were to apply Northern [Foods]'s current price-earnings ratio (10.8 times) to Greencore it would suggest a price of about €1.80," they say. "A similar enterprise value to Ebitda ratio (5.5 times) would suggest €1.35. We see no reason for Greencore not to be trading in this range on fundamentals and set our target price at the mid-point of €1.60."

While we would agree investors need to look beyond the obvious with Greencore, we are not buyers. Nearly a third of the stock is owned by a single shareholder, which Investec says is a "perceived stock overhang". Any move to sell the stake would obviously put downward pressure on the shares and, while we rather like Greencore, we would wait before taking the plunge. Hold for now.

Holidaybreak

Our view: Hold

Share price: 293.5p (+15.5p)

Carl Michel, the chief executive of the specialist holiday company Holidaybreak, which organised educational tours to destinations across the UK and Europe, argues "people are fed up with being fed up" and that consumer confidence is returning. That may well be true, but investors should wait for evidence before piling into the stock.

The shares were up 5.6 per cent yesterday, despite first-half losses widening by 21.5 per cent compared with the same period last year. The investment case, says Mr Michel, is that the group's education division is almost recession proof, with 60 per cent of capacity already booked up for next year, and that a restructuring plan that will take out plenty of costs is nearing completion.

While we recognise that Holidaybreak trades at a discount to its peer group, we would wait to see just how resilient the sector is in the all-important second half of the year. We also balk at the dividend being cut. Hold.

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