Investment Column: Carillion is cheap but not for the long haul

Click to follow
The Independent Online


Our view: Buy

Share price: 295.5p (+0.5p)

If debt is a dirty word, Carillion is busy trying to erase it. The company has an array of different businesses here and abroad, with a focus on construction, support services, outsourcing, healthcare and public-private partnerships. If you think that leaves it open to a degree of stick, you'd be right. But what about the investment case?

At the moment, at least, the signs are pointing in the right direction. Yesterday, Carillion announced the disposal of part of its stakes in two public-private partnership projects for £86.9m, which will generate a one-off profit of £12.2m.

The proceeds will be used to cut borrowing and the group expects to be in a positive net cash position by the end of the year. Given what has been happening over the last couple of years, that is not a bad place to be, and the transaction looks a sensible one.

It also frees up resources for new projects (the company is preferred bidder on two). Over the past 12 months, Carillion's shares have been volatile but the general trend has been upward (they have risen by nearly 50 per cent in that time), helped by the market recovery and improving economic sentiment. Of course, it's not all good news. Carillion's Middle East operations are likely to endure difficult times because of events in Dubai. The UK public sector is also set to shrink, although wheezes such as PPP, used to get debt off the Government's books, will probably continue.

At eight times 2010 earnings, the shares look inexpensive and there is a prospective yield of about 5 per cent to go with it, which makes the stock doubly interesting. We are not yet willing to be enthusiastic supporters of this business but, on valuation grounds, it looks to be worth a flutter.

That being the case we recommend a buy but be prepared to cut and run and take profits if the shares show significant gains in the coming months.


Our view: Hold

Share price: 563p (-3p)

Things are looking up at Renishaw. The engineering company has reversed the voluntary pay cuts it introduced at the start of this year, with employees set to receive their full salaries from the beginning of 2010. Renishaw even announced a partial refund, which will see staff reimbursed for a proportion of the cuts they accepted over recent months. Why should shareholders be cheering this?

Well, the turnaround reflects not just the recovery, with both orders and revenues up, but also the quality of Renishaw's managers. This is a business that appears to be on the right track and will make gains as the wider economy regains its composure. The shares have rallied with the wider market, more than doubling since they hit a low of 248.5p in March. But go back to January and they were trading at about 500p, compared to 563p last night. The gains narrow further if you go back to 2008. In mid-September of that year, with markets convulsing in the aftermath of the Lehman Brothers bankruptcy, they were within shooting distance of 800p. So there are grounds to believe there is room for further improvement, especially if Renishaw's interim results in January show continued momentum.

Still, the stock trades at 42.5 times Finn Cap's forecast earnings for this year and this appears high, particularly in light of the risks to the economy. If the recovery falters even temporarily, Renishaw may be knocked off course. There is much to recommend this company, but we think the shares are high enough for now. So hold.


Our view: Hold

Share price: 9.25p (-0.5p)

On the face of it, there is a lot to get excited about with Wichford, a property company based in the Isle of Man.

It lets the majority of its portfolio to governments, which are supposedly safer tenants. With the commercial property market returning to health in recent weeks, property is all of a sudden one of the industries in which to park your money. For investors, the story gets even better.

As part of yesterday's preliminary results, Wichford raised its dividend, giving investors a yield of more than 6 per cent.However, unlike other property companies, Wichford's shares have lagged in the last quarter, largely amid concerns about its burgeoning debt pile of £517m, against net assets of just £47.7m. Even otherwise favourable analysts argue that this is "undesirable leverage", but they believe property yields are are stabilising and any increase in value will be magnified in the performance of the [net asset value] per share. So the share price should rise, right?

Maybe. Our concern is that debt is a dirty word these days. Investors will be cautious anout any company that is leveraged so highly. We would sit on the fence for a while yet. Hold for now.