Investment Column: Connaught's house comes tumbling down
Tuesday 29 June 2010
Our view: sell
Share price: 135p (-80p)
Connaught was in furious damage-limitation mode yesterday after Friday's shock profit warning, which came less than half an hour before the market closed. Investors are understandably cynical about such moves, which appear designed to divert attention from a company's failings with bad news being released at a time when many shareholders and analysts are getting ready for the weekend.
If that was Connaught's intention, it has backfired spectacularly. Having fallen by a third on Friday night, the shares lost another third yesterday. They have effectively been in freefall. The problem relates to the company's business in social housing. Local councils have been delaying spending, putting Connaught's work such as re-wiring and other repairs, on hold.
Connaught argues that carrying out this sort of work accounts for only 30 per cent of its business, but that's not the point. What is disturbing is the way the company appears to have been caught on the hop. It apparently discovered what was going on only after a review meeting on Friday, hence the late profits warning.
This is a company that has been through some difficult times, with the departure of its previous chief executive, uncertainty over contracts and bid rumours, all combining to give investors a rollercoaster ride.
In April, however, we felt that some positive numbers and defensive characteristics of much of the work Connaught does (you can't put maintenance off for ever, after all) made it worth investing in. Apparently not.
There could be an argument for buying again at these low levels. But the trouble is, profit warnings often come in threes. Companies that indulge in them frequently find more problems during the following months. Prior to yesterday's fall, Numis had the shares on 11 times forecast 2010 earnings, with a prospective yield of 1.6 per cent. That looks like fair value. But, sad to say, we've no confidence in Connaught, so sell out.
United Business Media
Our view: buy
Share price: 505p (Unchanged)
It has been a rocky downturn for many media companies and United Business Media (UBM) has been no different. The group's share price is currently around a third lower than pre-recession levels, but some think it could be working its way through the depths of the cycle. The group sealed a deal yesterday to buy Corporate360, a Hong Kong webcasting company to integrate with its PR Newswire business. The acquisition will bring revenues of $400,000 this year, but more importantly it will increase exposure to the fast-growing Asia-Pacific region.
Beyond PR Newswire, UBM's operations are manifold. Events make up a third of revenues, and the business is seeing some growth off the lows of last year. Trading in Asia is improving and Europe is stabilising, although the US and the UK remain volatile.
The data, services and online arm makes up 27 per cent of revenues and is expected to benefit from the growth of online marketing revenues. Yet, the magazine arm has suffered and the company is managing down the proportion of revenues generated by the division. This, as analysts have said, may not be a bad thing for the group.
UBM is one of the more defensive of the media stocks, partly from its limited reliance on advertising, and there is strong opportunity in its online growth. KBC has the stock on a price of 10.9 times this year's estimated earnings, cheaper than most of its rivals. We would suggest taking advantage of this. Buy.
Our view: Buy
Share price: 97.5p (-2.5p)
Last year, just as the corporate world was emerging from the worst of the downturn, Creston, the marketing and communications services group that counts GlaxoSmithKline and Panasonic among its clients, said media companies were the best indicator of the wider economy's health.
It wasn't far off the mark. As the economy has maintained its fragile recovery, so Creston shares have put on weight – gaining 47 per cent, including a 10 per cent jump in the past week. Yesterday, the company said the start of the financial year was in line.
Profits and revenues were down in the last financial year, but we would not be too concerned. Creston detailed the sale of its advertising arm, DLKW, for £28m, a figure that analysts said was "healthy" and "points to a reorientation of the business to more future-focused research and communications activities". All good then.
Even though the dividend yield is just 1 per cent, trading on an enterprise value to Ebitda of just 5.4 times, Creston is undeniably cheap. Yesterday's sale also has the added advantage of leaving the company debt free, a benefit not to be sniffed at. Buy.
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