Investment Column: Close Bros still exists and it is doing nicely

Trafficmaster; Mothercare
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The Independent Online

Our view: Buy

Share price: 730p (+18.5p)

It always comes as something of a surprise that Close Brothers still exists, at least as an independent entity. It has marched to the top of the hill with takeover talks before, only to march back down again, and remains one of the last remaining traditional British merchant banks.

It is also one that is doing reasonably well if yesterday's interim management statement is to be believed.

Close may have a bit of a ragbag of businesses, but they mostly appear to be pulling in the right direction. The environment is "challenging", as it is for everyone, but the company expects a solid performance for the year.

The loan book is actually growing, but surprisingly, bad debts fell.

At the same time, fund management has had a decent start, with assets under management up 5 per cent and fees largely stable.

The real humdinger, though, has been the securities business, Winterflood's, which is going like a train and has seen the number of bargains executed per day increasing to all-time highs, supported by the stock market's recovery and improving levels of interest from retail investors as a result.

The shares have bounced strongly since hitting their nadir at the height of the financial crisis, although they have eased back in the last month or so. Overall, the stock is up 23 per cent in the last 12 months.

On a rating of 13 times expected full-year earnings, falling to 10.9 times next year, they are not overly expensive, though. The prospective yield of nearly 6 per cent is also worth having. Apparently the company's new shareholding guideline mandates that executive directors are to "build and maintain a shareholding of two times salary over a reasonable timeframe".

On yesterday's statement, they could do worse than buy at the first available opportunity.

We'd be in there with them. Buy.


Our view: Hold

Share price: 31p (-0.5p)

Finding your way around the equity market in the last year has been almost a tricky as navigating the Tottenham Hale one-way system.

Investing in Trafficmaster could have helped in both respects. As well as guiding drivers and providing vehicle tracking services, the group's shares have jumped by a remarkable 168 per cent in the 12 months.

The company confessed itself pleased with yesterday's interim management statement, which said that full-year profits are likely to be in line with last year's numbers. "We are optimistic about the long term prospects for growth," Trafficmaster added in a statement. Despite Trafficmaster shares having risen so much in the last year, they are still undervalued, say the watchers at Panmure Gordon, who argue that the stock "trades at inexpensive multiples of 8 times 2009 and 6 times 2010. We reduce our price target to 52p from 56p, which equates to a price earnings ratio of 10 times for 2010."

The analysts say buy, but do point out that there is a timing risk in closing some large fleet contracts that could damage revenue prospects this year. We would also have concerns about car sales next year when the Government's popular scrappage scheme runs out of money. Hold.


Our view: Buy

Share price: 627.5p (1.5p)

In the same way that army officers used to be described as having a good war if a decision they had made had won the plaudits of the top brass, so Mothercare, has had a good recession.

True, there will be no gongs from the Ministry of Defence, but the market has rewarded the group handsomely, with the stock leaping by 115 per cent in the last 12 months. The company has pushed its international and online businesses, declaring yesterday that overseas sales rose by 29 per cent in the first half-year, contributing to an 11 per cent jump in pre-tax profits.

Such is the group's confidence that the chief executive, Ben Gordon, struggles to come up with any risks facing the company over the next 12 months, and instead is pressing on with Mothercare's expansion, with more shops that previously indicated being opened this year and an even greater push into the emerging markets, especially India and China. The group also announced yesterday that it is planning to create 400 jobs in the UK (maybe there will be a gong, after all).

Mothercare's stock is pricey, trading on a price to earnings ratio of more than 17 times. The watchers at Investec are doubtful, arguing that investors should hold fire: "We struggle to justify the current valuation, which, even post upgrades and allowing for cash balances, trades at a premium to all bar the most extreme recovery stories in the sector."

We take the point, but do not share the concerns. Buy.