Investment Column: Buy Cineworld for the blockbuster yield

Wincanton; TT Electronics
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Our view: Buy

Share price: 156.5p (-8.5p)

The key to investing in Cineworld, the cinema operator, is the yield. The group talks about the quality of films produced by the American studios (punters should wait with bated breath for Jim Carrey's version of A Christmas Carol), and the increasing number of movies being shown in 3D as reasons why investors should be excited. We reckon, however, that the most compelling rationale for buying remains the 6.2 per cent yield.

We also think that investors can reasonably expect a rise in the dividend at the year end. Chief executive Steve Wiener rightly says that he will not discuss his plans for the dividend with a newspaper, but does say that it will be reviewed in light of yesterday's stellar interim results. He professes confidence in the rest of the year, and as such, investors should be asking searching questions if the dividend is not increased in six months' time.

We like Cineworld, and the company has shown itself adept at coping with the recession. Admissions in the first six months of the year were up 18 per cent, and while sales of popcorn and the like are flat, getting bums on seats is key to success in the industry.

While the yield and the hope of a bigger full-year dividend would persuade us to buy the stock, the share price itself offers less to get enthralled about.

The small sell-off yesterday indicates that the market thinks the current level is already about right, something we would not demure from, and the watchers at Evolution agree, pointing out that "the valuation is still reasonable at 9.8 times earnings (6.2 times enterprise value to Ebitda) for the year ending December 2009, falling to 9.2 times (5.9 times) for 2010".

For us it is all about the dividend yield, and for that reason we think the investment case is compelling. Of course, any return to crippling recession would be bad news, but then so it would be for most other equities too. Buy.


Our view: Buy

Share price: 194p (+2p)

Wincanton says that it delivers supply chain solutions. Whatever that means, the group has found it tough in the last year or so as demand for hauliers' services has faltered during the recession. The situation has barely improved, with the chief executive, Graeme McFaull, saying yesterday as part of the group's trading update that conditions remain difficult and that there remains pressure on volumes. Furthermore, Mr McFaull said that the group always expected the financial year, which ends in March, to be flat, and that is only after £10m of cost savings.

Hardly an exciting investment story, you might think, but for the same reason that we would put our money into Cineworld, we would be buyers of Wincanton (albeit we think Wincanton is a riskier punt).

The experts at Investec argue that investors should hold the stock, but do concede that some, like us, would be tempted to part with their cash: "We are maintaining our forecasts and making no change to our price earnings based target price of 210p. Our recommendation is unchanged at hold, but some investors may be attracted by forecast full-year 2010 dividend per share yield of 7.8 per cent."

Mr McFaull says the group is winning new business and market share, and like every other company under the sun, Wincanton is well positioned for a return to economic prosperity.

We think Wincaton is doing the right things, but will continue to find the going tough for some time. We are buyers on the strength of the yield. Buy.

TT Electronics

Our view: Hold

Share price: 48.75p (+8.75p)

TT Electronics, the industrial components supplier, has been caught in the eye of the recessionary storm.

The group, which supplies the automotive, defence and other industrial sectors with various components, said yesterday that last year's first-half profit had swung to a loss of £3.9m. What is maybe worse for investors is that the company says that trading remains "challenging", which is business-speak for very difficult. The shares are still some way behind their 118p year high, and we would remain cautious about investing at this stage.

It is by no means entirely bleak, however. While it is of no consolation for those involved, the group has cut 21 per cent of its workforce to cut costs, and even though the interim numbers are undeniably poor, TT says that it has been profitable since May. Investors that have stayed with the group have seen the stock jump by 48 per cent in the last six months as it dawned on the market that the end was not nigh after all.

Hats off for all the remedial work, and we agree with chief executive Geraint Anderson when he says that the group will be fitter for the eventual upturn. We would wait for evidence of improvement in the next set of numbers before buying, however. Hold.