Investment Column: Costain will prove a predictable winner
John Menzies; Cohort
Friday 26 June 2009
Our view: Buy
Share price: 25.75p (+1.25p)
Every time the construction and civil engineering group Costain makes an announcement on trading, the story is the same. Profits are always up, revenues are always up, the order book is always up, and just for good measure, there is usually a new client or two signed in on another long-term contract. Yesterday's pre-close trading statement was a bit dull in that nothing has changed. Predictably, the shares nudged ahead slightly.
Costain's trading performance is testament to the group's strong execution of its plan to target blue-chip clients in regulated industries. In the last year, Severn Trent has been signed up on a 10-year contract, while the group has won a deal with Manchester council for one of Europe's biggest waste disposal projects. For those that have not yet cottoned on, we rather like Costain, and think the shares are certainly worth holding. Naturally, however, there is a small snag.
The shares are pricey and each time Costain puts out one of its impressive updates, the share price increases by a little less than last time. The truth is that everyone expects Costain to keep churning out the good results and the stock has become stymied.
Chief executive Andrew Wyllie argues that with growth expected, both from acquisitions and organically, the share price will improve, but the market is not yet buying that message.
Ultimately, we would be buyers, however. In recent months, there has been something of a move to cyclical stocks as fears of economic Armageddon have receded. We would still argue that the economy is sickly and that investors should still be chasing stocks like Costain. Buy.
Our view: Buy
Share price: 157.5p (+23.5p)
If you had to name two industries hit particularly hard by this recession, no one would argue if you picked newspapers and aviation. Newspapers are struggling from online competition and a drop in advertising spending, while cargo carriers are having a woeful time as companies export fewer of their goods.
Not a happy picture for John Menzies, the newspaper distributor and air cargo handler. Add in what the market perceives as too much debt, and you surely have a dog.
It might come as a surprise, then, that we would be buyers. The group's update yesterday sent the stock up 17.5 per cent after it said trading is in line with expectations and full-year profits will hit targets. Finance director Paul Dollman says that cargo volumes are drastically down on previous years, but that they have hit the floor. The group has cut its debt and removed plenty of cost, and while newspapers sales continue to struggle, Menzies benefits from the inevitable hike in cover prices. The company will also benefit from recent acquisitions and will take its market share in the newspaper distribution sector up to about 45 per cent.
Add into that the fact that the shares are cheap – "we increase our price target to 200p, just over 4.5 times enterprise value to Ebitda, reflecting the encouraging news on debt reduction and the better than expected trading performance," say the watchers at Brewin Dolphin – and we think there is a good opportunity to buy an undervalued stock. We would never claim that Menzies is a conviction buy, or even that it has too many defensive qualities. Frankly, it does not, but we do think the share price will continue to rise. Buy.
Our view: Buy
Share price: 175p (+3p)
In bygone times, a cohort was a tenth of a Roman legion, although it is unlikely that Caesar's army had any of Cohort's technology at its disposal. The group provides electronic technology and advisory services, largely to the defence sector, and unlike many Alternative Investment Market-listed companies of a similar size, Cohort's full-year results detail higher profits and a hike in the dividend.
Investors with a passing interest in politics will be aware that the present debate between the parties concerns which will cut public spending most. Given the country's debt, it is a given that both parties will have to rein back in certain areas, and with British forces having now left Iraq, defence is certainly an area that will see compressed budgets. Cohort is aware of this and has taken on overseas clients, including the Thai airforce and a mystery Middle Eastern client that chief executive Andrew Thomis would rather not name.
Cohort is a very resilient business, and for those not squeamish about investing in defence companies, the group is a good punt. That the stock trades at "undemanding" levels, according to the analysts at Numis strengthens the investment case. Buy.
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