Investment Column: Consumer outlook argues against Next

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The Independent Online


Our view: hold

Share price: 1,868p (-32p)

Along with many other retailers, shares in Next have come under pressure over the past five months.

The fashion and homewares group's shares powered past 2,300p in October but have fallen back since then, as investors fretted about a deteriorating outlook for consumer spending.

When Next, which is due to issue full-year results next week, last updated the market on 5 January, it reported like-for-like retail sales down by 6.1 per cent between 1 August and 24 December. Since the first week of January, trading is unlikely to have improved much and could well have deteriorated further, as the reported and anecdotal evidence has confirmed a dire February for the high street.

The market has also been unnerved by Next's comments on hiking its own prices by about 8 per cent on its spring and summer collection due to higher input costs – most notably on cotton – and the VAT rise to 20 per cent.

Following the impact of the dreadful snow before Christmas, Next guided towards annual profits of between £540m and £555m for the year to the end of January. Given the headwinds facing consumers, it may well find it hard to deliver a substantial improvement on this performance and Nomura has forecast flat pre-tax profits for its current financial year.

However, potential investors will be cheered to know that Next has a track record of beating City expectations or, in terms of its guidance, under promising and over delivering.

It's also worth noting that the successful Next Directory, its catalogue and internet operation, now accounts for 40 per cent of profits and enjoyed robust growth in the fourth quarter. Furthermore, Next's shares now only trade on a forward earnings multiple of 8.4 and the company is expected to continue delivering healthy earnings per share growth. Its share price should also be supported by its ongoing share buyback programme. But with the outlook for its high street stores looking tough, we urge caution until the outlook on a sustained recovery in consumer spending is clearer.

WS Atkins

Our view: buy

Share price: 694p (+3.5p)

WS Atkins's £785,000 acquisition of RWE nPower's Scottish consultancy and technical support scheme may be small, but it is a significant move for the group. It brings an extra 30-odd people into the engineering and design company, and is right in line with the group's long-term strategy to expand its activities in the energy sector.

A key element of the acquisition is the people. The Technical Services Scotland (TSS) team will bring in electrical and process engineering skills, as well as control and instrumentation, metallurgy and site-based testing and diagnostics for power generation. Experience in biomass generation and grid links for offshore windfarms are also valuable assets.

Keith Clarke, the chief executive, yesterday stressed the extra capability from the TSS purchase.

"This acquisition of complementary skills strengthens the energy consultancy services we can offer for the design of new power generation facilities and the life extension of existing assets," he said.

The deal is not big enough to directly affect the group's financials, which a recent statement confirmed to be in line with expectations despite "challenging" trading conditions. But it does signal WS Atkins's active implementation of a sound strategy.

Add in the fact that the stock is attractively valued – analysts at Panmure Gordon value it at 8.4 times forward earnings, with a dividend yield above 4 per cent – and the investment case comes almost readymade.


Our view: buy

Share price: 74.5p (-3.5p)

Brady makes systems software for the metals, energy and soft commodities sectors. And given the uptick in capital expenditure in those markets, it is no surprise that the group issued what were strong full-year figures yesterday.

Sales revenues were up 36 per cent at £11.1m, while recurring revenues rose by nearly 40 per cent to about £4m. The group also used the occasion to raise its payout by 8 per cent, no doubt pleasing income investors.

The valuation is also supportive. Adjusted for cash, Brady trades on multiples of 11.4 times forward earnings for this year, and under 10 times forward earnings for next year, according to Cenkos. That leaves it an unjustified discount of around 15 per cent to its peers.