Investment Column: Cattles' success depends on bank licence

Informa; Colt Telecom Group
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The Independent Online

Our view: Cautious hold

Share price: 41.5p (+6.75p)

Investors could do spectacularly well if they buy shares in the financial services business Cattles. Its stock is in the bargain basement and, as long as the group realises its long-held ambition of securing a banking licence over the next few months, meaning it can rely less on the illiquid wholesale lending markets, punters are likely to cash in.

Or, they could do spectacularly badly. Cattles insists is not a sub-prime mortgage lender, which is true: it does not provide mortgage finance. Despite the unflattering connotations, however, the company is very much a sub-prime lender, counting among its clients those who would struggle to obtain loans from high street banks. Its finance director, James Corr, admits there is a risk of the arrears rate ticking up to 12 per cent (from the present 8 per cent), as more people lose their jobs. However, he says the group is experienced at managing the problem and, at present, the situation is controllable. A failure to obtain a banking licence would also hamper growth, he adds.

House broker Citigroup says Cattles is a high-risk punt but argues that the odds are on the banking licence being granted. It said in a note: "If, as we expect, Cattles is granted its banking licence before end 2008, the share price rally could be very strong. Cattles now trades at just 1.5 times 2009 earnings (24p). Returning to even the four to five times multiple of a few months ago would imply a spectacular rally."

Investors buying now have some serious nail-biting to do. Even if a banking licence is secured, the macroeconomic situation will continue to strangle the stock, even though yesterday's upbeat trading update said the numbers were on target and the group's competitive markets were as good as ever.

In ordinary circumstances, Cattles would be a speculative buy at the risky end of a portfolio. These are not ordinary circumstances and there are plenty of other depressed stocks that buyers can take without the added risk. Cautious hold.


Our view: Cautious hold

Share price: 200.25p (-5.75p)

In May, Peter Rigby, chief executive of the publishing company Informa, said the market did not fully appreciate the group's story: yes, advertising income is down, but it contributes only 3 per cent of its revenue anyway. Better, he said, to look at its operations in booming markets such as the Middle East.

At that point, Informa shares were trading at 374p having come down from a year high of 539.5p. Looking at today's share price, investors are clearly not listening: the stock is down more than 60 per cent over the past year, despite the ongoing rumbled of interest from private equity firms Apax and Carlyle.

But perhaps buyers should listen. These takeover rumours will not subside and punters buying today would undoubtedly get a hefty uplift if a concrete bid came in. "Shares are trading on a 2009 price-earnings ratio of just five times and are trading at less than half the 450p cash offer that was rejected only last month," say experts at Royal Bank of Scotland. "Resolving balance sheet pressures will be key to the share price performance, but the group has plenty of attractive assets that could resolve this, and no shortage of recently interested suitors."

There are issues to worry investors, however. Despite an upbeat management statement yesterday. Informa's debt is not insignificant at £1.2bn (4.1 times Ebitda) and that should be a worry, especially as a host of companies are coming under increased refinancing pressure. What is more, the global nature of the economic crisis means the Middle East is not going to remain a panacea for groups like Informa. Hold.

Colt Telecom Group

Our view: Hold

Share price: 77.5p (-4p)

Colt Telecom likes to keep its head below the parapet. It is not well known to consumers, partly because it is not particularly vocal, but mainly because it solely focuses on business. It put out mixed third-quarter results yesterday. Analysts pointed to slightly lower revenues but added that its bottom-line profits and cash flows came in ahead.

Of the group's revenues, the data business continues to grow. This 12 per cent growth on last year is positive news as it now makes up 55 per cent of revenues and remains high margin. Revenues from the voice business declined a further 6 per cent.

Colt was upbeat about the future and did not change its full-year forecasts, which was reassuring. The problem is the macro-environment and how the company reacts, as well as the impact from its financial services customers, which make up almost a third of sales.

Colt is at its lowest historical rating, as analysts from Teathers pointed out: at 2.3 times full-year Ebitda it looks very cheap – but wider problems in the market make this a little to risky. Hold.