Investment Column: Carillion's public sector work sees it safe

Restaurant Group; Rathbone Brothers

Our view: Buy

Share price: 260p (+35.5p)

Most business leaders have it drilled into them early in their careers: do not say anything that could come back in a few years and bite you on the derrière.

The result is that few chief executives will say that their company is recession-proof, preferring instead the rather silly-sounding "recession resilient", a phrase that means little in practice and was probably dreamt up on a public relations away day.

The same is true of Carillion boss John McDonough, who refuses to use the "P" word, despite the support services and construction group posting a 55 per cent hike in pre-tax profits to £158m yesterday, and a 19 per cent jump in earnings per share.

Carillion spends 80 per cent of its time in the UK doing work for the Government or the regulated services; a sector that is booming at the moment as the Government seems eager to spend its way out of the recession. This work gives Carillion, which does highway maintenance and looks after defence facilities, a natural protection against the worst of the recession.

Mr McDonough says he is particularly pleased with the Treasury's announcement on Tuesday that it is committed to spending £13bn on PFI projects in the coming years, which Carillion reckons it will benefit from.

Investors hardly need to be convinced that they should be looking for safe stocks in this climate, and you are probably as safe with Carillion as with any other company. The other plus for buyers is that the stock is still affordable, despite yesterday's results leading to a 16 per cent jump in the shares.

Analysts at Panmure Gordon are keen, saying that trading on a 2009 price-earnings ratio of 5.8 times, Carillion comes at a discount to its peers and that the yield is "an attractive 6.3 per cent versus the sub-sector average of 4.8 per cent". Buy.

Restaurant Group

Our view: Buy

Share price: 120p (+5p)

The Restaurant Group concedes that the condition of the UK economy is tough for consumer-facing businesses and the bad news for those already creaking under the strain is that the company expects 2009 to be worse.

The group, which owns the Garfunkel's and Frankie & Benny's chains, was not talking about its own business, however, which had a very good year in 2008 judging by yesterday's full-year results: full-year underlying earnings, or Ebitda, were up 14 per cent, with profits up 13 per cent.

The shares reacted well and closed up 4.4 per cent, with the analysts generally being supportive. "We believe the Restaurant Group is well-positioned to continue outperforming in more challenging conditions, supported by its positioning as a low spend, value operator in captive markets. We think the valuation is attractive [5.8 times enterprise value to Ebitda] and recommend accumulating the shares at current levels," say those at Numis.

There are, however, a few chinks in the armour. While revenues are up 4 per cent in the first nine weeks of 2009, sales, on a like-for-like basis, are down 2.5 per cent. The stock also trades at a premium to some rivals and the airport concession business, about 16 per cent of the group, will struggle this year as air passenger numbers fall.

Despite all this, it would be wrong to ignore a group that is clearly performing well in these uncertain times. Buy.

Rathbone Brothers

Our view: Avoid

Share price: 720p (-6p)

Several experts say that equity market prices are reaching a nadir. Some of the same experts were saying the same at various points last year, and will no doubt be heard of again in the near future.

Equity markets, in particular, have been struggling for a while, which has led to problems for asset and wealth managers such as Rathbone Brothers.

The group issued its full-year numbers yesterday, saying that profits were down 9.5 per cent on 2007; assets under management (the industry's preferred method of measurement in good times), are down 16 per cent.

The chief executive, Andy Pomfret, says the numbers are good, against the backdrop of dreadful markets.

As if to prove the point, and because he says that he is confident that 2009 will be strong for the group, the dividend has been increased by 4 per cent.

While this should encourage investors, we would still be nervous. Mr Pomfret concedes that there is little the group can do to mitigate the woeful markets, even if he does expect them to get better by the fourth quarter.

We would be worried about buying any group that invests in financial markets, and while Rathbone has done a good job of separating the wheat from the chaff, we are not convinced that the market will reward it for doing so. Analysts at Daniel Stewart would agree, and acknowledge the strong 2008 results, but would be sellers on the outlook. Avoid.