Investment Column: Check out Regus at bottom of the market

Business Post Group; Care UK
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Our view: Hold for now

Share price: 41.75p (-3p)

The recession will force a number of companies to the wall in the coming months and those that are left will require less office space. That simple equation is why investors should rightly be rather nervous about Regus, the worldwide serviced office provider.

The company's argument, of course, is that as firms start to feel the pinch they look for more flexible rents, meaning that Regus's services, which can be limited to finding space for just one day a week, or access to a business lounge, come into their own. The group says that it is still getting enquiries about new office space at a rate of knots, and issued a market update yesterday saying that revenues were up 25 per cent in the last quarter.

And the balance sheet should also interest buyers: the group will have paid off the last of its debt by the end of this month and has strong cashflows. Analysts at Dresdner Kleinwort argue that "market conditions will become more difficult into 2009 and we expect both occupancy and pricing to come under pressure, but we think this is more than in the valuation. At the current price, Regus is trading at 4.6 times 2009 price earnings [and] 1.4 times enterprise value to Ebitda."

Even chief executive Mark Dixon concedes, however, that not everything is that rosy. He admits that the group has to run faster and faster just to stand still and that undoubtedly the looming downturn will adversely affect the group. We think it would be folly to recommend a stock that operates in choppy markets, but Regus is certainly one to watch once the market hits rock bottom. Hold for now.

Business Post Group

Our view: Buy

Share price: 275p (-2.25p)

Simple economics would suggest that as economic activity slows, so the need for businesses to use postal services will also diminish.

That would be a problem for Business Post if the group was limited to parcels, says its chief executive, Guy Bushwell, who declared that yesterday's interim results were "satisfactory". Pre-tax profits were up £1.2m to £6m, while revenues jumped nearly £30m to £194.5m.

Business Post is benefiting from growth in its other areas such as mail delivery. Mr Bushwell says that 70 per cent of the letters the group transports are statements, which will be even more closely scrutinised during a downturn. Revenue in the company's UK mail arm grew by 34.4 per cent in the period.

There are plenty of compelling reasons why investors might consider buying the stock. It is expanding into other areas, such as competing against the Royal Mail's first-class postal service, and in a recession those looking for a solid balance sheet will have the cockles of their hearts warmed by Business Post's debt of just £1.9m.

The analysts were seemingly more pleased than Mr Bushwell with the numbers. Those at Seymour Pierce described them as "very positive," adding that: "We are maintaining our 2009 pre-tax estimate at £16.9m and adjusted earnings per share at 21.9p.

"The shares are therefore on a price earnings ratio multiple to March 2009 of 12.7 times, yield 6.1 per cent. The shares should continue to perform well ahead of the Christmas online shopping season and the mail business adds a defensive aspect."

The watchers urge clients to buy the stock saying that the share price should grow to 320p.

Punters still interested in buying shares should spend time considering Business Post. The group has growth, a strong balance sheet and a share price that has stood up well to the recent choppy markets. The shares might be a little pricey, but that should not be a primary concern at the moment. Buy.

Care UK

Our view: Hold for now

Share price: 235p (Unchanged)

A sad fact of life is that everyone will grow old and less capable, irrespective of whether the economy is in meltdown. While this is undoubtedly bad news for those affected, it is good news for the health and social care group Care UK.

In theory at least. The company should be a safe bet for investors in a recession, depending as it does on government money. The group's full-year numbers published yesterday showed that revenues were up to £341.6m, compared to £275.7m last year. Operating profits were also up 20 per cent.

However, investors who already have Care UK shares cannot be overly impressed by the fact that despite notionally being a safe stock – chief executive Mike Parish describes the group as defensive – Care UK's shares are down by nearly a third in the past year.

The reasons for this are groundless, argues Mr Parish: the company's debt, at £182m, is high but is in place until 2015 and the company has headroom of about £80m. The Government is also likely to continue with its mixed economy approach to the NHS, he adds.

Analysts at the house broker Investec argue that the market has got it wrong on Care UK: "From a valuation perspective, we struggle to understand why the market continues to value a defensive and high-quality business such as Care UK at nothing more than a market price earnings ratio."

We would argue that the market is the best arbiter of a company's share price. While it may not necessarily give due credit to some cases, investors who buy Care UK today may find that there are not too many other takers. Hold for now.