Investment Column: Don't be fooled by praise for Provident
Balfour Beatty; Filtrona
Friday 14 January 2011
Our view: Avoid
Share price: 999.5p (+96.5p)
Now that Britain's banks have come over all parsimonious in every area apart from the bonuses they pay to their City-based staff and executives, credit has become very difficult to get hold of. It sometimes seems that you'd have to become one of those bankers to get approved for a loan.
Regrettably, that's manna from heaven for companies like Provident Financial. "Provvie", as it is known, takes a more liberal view of the term "credit-worthy borrower". It won't lend you much to start with, but once you can prove that you're good for the money, it will get its claws deep into you and lend again and again. And it will make you pay an astonishing amount of money for this. Guess what? Provvie had a really happy Christmas. The company says it will now beat full- year profit forecasts, and analysts were gushing with praise.
But Provvie hasn't been without its struggles over the past few years. The demise of its Yes Car Credit business was a horror show and all sorts of people keep taking potshots at it, notably Barnado's and the Office of Fair Trading. And there is a bear case: the poor will increasingly suffer from the Coalition's cutbacks and may therefore struggle to repay its loans. Our sell recommendation at 821p in July might not look too clever now, and the yield of 7 per cent is stellar.
This column is here to judge investment cases, but even if you didn't consider what Provident Financial does as a social ill, there are good reasons to be cautious about these shares, which have been run up recently. So avoid.
Our view: Buy
Share price: 323.3p (-3.7p)
There's still time to get into Balfour Beatty on the cheap – but probably not for long. According to yesterday's trading update, the construction and services group is on track for full-year results as expected, and the company is still a favourite tip in an otherwise beleaguered sector.
On the downside are the dangers that George Osborne's public spending axe presents to the UK construction market. But the upside outweighs such parochial concerns. Balfour has a comfortingly international portfolio, including the project management group Parsons Brinckerhoff; its US operation, which will be included in the full annual results for the first time this year, has exceeded expectations; Hong Kong is also doing well for the company, and a string of contract wins is helping buoy the infrastructure division. Balfour currently holds a £15bn order book and recorded an average cash position of £400m in the second half, up from £342m in the same period of 2009.
And even though the shares have already seen some decent movement over the past year – rising by a healthy 19 per cent – the multiple of 8.9 times forecast earnings is still below the sector average of 10 times. Expect a spike in the share price when full-year results are published in March. Buy.
Our view: Buy
Share price: 278.1p (+24.5p)
You know something is right when a company's stock rises by as much as 9 per cent after it posts a trading update. Filtrona cheered investors with the news that it expected last year's sales to be up 10 per cent on the previous 12 months, sending investors charging in. The company, which makes everything from cigarette filters to self-adhesive labels, also named Colin Day, Reckitt Benckiser's finance chief, as its next chief executive.
The markets were clearly pleased, and rightly so. Despite performing well, Filtrona's shares remain affordable, trading on multiples of 11.7 times Altium's estimates for this year. Further out, on the forecasts for next year, it is on less than 11 times, which is undemanding, particularly given that Filtrona boasts a forecast yield of 3.4 per cent for 2011 and nearly 4 per cent for 2012. Buy.
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