Investment Column: Carillion well-placed to weather the storm

Clapham House Group; TMN Group
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The Independent Online

Our view: Buy

Share price: 239p (+19.5p)

In these gloomy times, there are few chances to recommend a buy. But Carillion is just such an opportunity.

Yesterday's full-year trading update was a rare example of a forecast-beating report. At less than £275m, the construction and support services group's debt is well below its £300m target. Earnings per share for the year are expected to grow by 15 per cent, some 5 per cent more than forecasts. Revenue growth in the support services business is likely to come in ahead of last year's 4.1 per cent.

To top it all, the integration of Alfred McAlpine – a rival bought for £572m 12 months ago – is proving even more valuable than expected. All cost savings have either been delivered or are well on track, Carillion said yesterday, and will be worth £15m this year, £35m in 2009 and £50m in 2010 – a total of £15m more than planned.

Even the group's construction portfolio is well placed to weather the recessionary storms. Only 10 per cent of Carillion's UK profits are in the building sector. The majority of its business is either in support services, or in lucrative public private partnership (PPP) deals. PPP contracts have generated cash proceeds of £179m in the past five years and there is a healthy pipeline of new projects. The company's biggest construction business in the Middle East, and it expected to deliver margins of at least 6 per cent in 2008. Taken together, the company has relatively healthy prospects in this unhealthy economic world. Buy.

Clapham House Group

Our view: Sell

Share price: 76p (+8.5p)

The chairman of Clapham House Group believes that its Gourmet Burger Kitchen chain is the fourth "breakthrough" restaurant brand to hit the UK high street in the past 25 years, following in the footsteps of Pizza Express, Nando's and Wagamama. Lending credence to David Page's bold statement, the restaurant group yesterday delivered another set of tasty profits and sales.

For the six months ended 28 September, Clapham House – which also owns the Tootsies and The Real Greek chains – delivered Ebitda before restructuring costs up by 26 per cent to £3.7m, on revenues up 21 per cent to £30.3m. As it faces a consumer recession in 2009, Clapham House has reduced its net debt to £12.1m by the half-year end, renewed its banking facilities until June 2012 and has all but applied the brakes to its expansion programme.

On the downside, the performance of its profitable Tootsies and The Real Greek chains is "stable", but less stellar than Gourmet Burger Kitchen. Furthermore, all Clapham House's restaurants are likely to find trading more challenging next year; and its shares already trade at a forward price to earnings ratio of about 10 for its 2010 financial year, which is relatively expensive compared to some of its sector peers. While the company looks to be a long-term buy, its shares are likely to face choppy waters in 2009 – unless there is some corporate action on its share register. Sell.

TMN Group

Our view: Hold

Share price: 8.5p (-3.5p)

Dire numbers out this week predicted that global advertising spend was to fall $14bn (£9.5bn) worldwide in 2009, and in the past couple of months specialist email marketing has suffered.

It was this part of the business that investors were focusing on yesterday at TMN, a digital marketing group, and judging by the share price performance they weren't too happy with what they saw. This year has been tough for the group, which offers marketing services to companies looking to benefit from new media. The company's share price peaked at 94p in February last year and has been on a consistent slide since. It was propped up earlier this year as two companies expressed interest in taking it over, but as both bids dissolved, so too did the share price. It was at five-year lows yesterday.

In yesterday's interim announcement, revenues initially looked good, rising 72 per cent, although the company admitted the cash flow mainly benefited from new acquisitions. Pre-tax profits sunk by almost two-thirds to £500,000, demonstrating quite how tough email marketing is. Display advertising was "challenging" in September and October, it said. Unfortunately for the TMN, the market is likely to get worse into 2009, according to, well, just about everybody.

After a successful cost-cutting programme, a diverse portfolio, and headroom on its newly-secured debt facility, yesterday's 25 per cent share price falls suggest the stock is not worth selling and should really have some upside. Only the brave should risk buying, however.

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