Investment Column: Don't waste your chance to buy Shanks

Dawson Holdings; Ascribe
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The Independent Online

Our view: Buy

Share price: 195p (+5p)

Waste is sexy – or at least it is if you are a shareholder in Shanks, the waste management, recycling and power generation group which operates in Britain and the Benelux countries. Its trading statement yesterday said its interim results would be better than some analysts expected. The group's shares rose by more than two per cent.

With landfill taxes expected to rise in the UK, the European Commission setting mandatory recycling targets, and green tax credits being offered to organisations which use the types of processes Shanks offers, the company could be on the cusp of something quite exciting. Its chief executive, Tom Drury, cautions that the credit crunch could have some impact on the business but he reckons there is not much else to stop its steady progress.

He believes his shares are undervalued (he recently bought at 217p and 208p). It is ridiculous, he argues, that analysts get excited when the stock nears £2. However, analysts at JM Finn say Shanks's shares are already fully valued, adding: "On our estimates, the 2008/09 price-earnings ratio (PE) is 12.6 times and the yield is 3.4 per cent. Fair value, especially as an assessment on PE criteria alone fails to attribute any value to the UK PFIs which last year were slightly loss-making from sales of £43m."

However, not too many stocks are as defensive as Shanks at present. Buy.

Dawson Holdings

Our view: Hold for now

Share price: 58p (+5.75p)

The newspaper business is not exactly booming, so you might expect companies that serve the industry to be doing poorly too. However, the media distribution group Dawson Holdings, which gave a trading update yesterday, proves this theory wrong. Its shares rose after it said it expected to deliver annual results slightly ahead of expectations.

The group's finance director, Hugh Cawley, said Dawson's diversity and cost-saving programme had helped to deliver good news. It hopes to save up to £2.5m a year, while the fact that 35 per cent of its profits come from three divisions not connected to newspapers – book distribution, other media and marketing – also helps, he says.

For investors, there is yet more good news: Dawson shares are undervalued according to house brokers Altium and Dresdner Kleinwort, especially after the stock fell off recently, having traded at almost £1 back in April. "The valuation of the company is compelling in our view. The PE ratio is very low, the free cashflow is well into double figures and so is the dividend yield at 14 per cent," say analysts at Dresdner, who reckon the stock will reach 128p over the next year.

However, with every silver lining there is inevitably a cloud. Dawson is the smallest of the three big players in the sector and, while it is undoubtedly doing well, there is the chance that it will suffer if investors seek a safer haven in a bigger rival. Indeed, in the current market, it is hard to see how the shares will reach Dresdner's target price. Mr Cawley said Dawson, unlike peers such as Smiths, was more defensive because it operated in several markets. We agree, but investors should wait a while before jumping in. Hold for now.

Ascribe

Our view: Buy

Share price: 23.5p (1p)

The difficulties faced by groups on the Alternative Investment Market are well documented. As the credit crunch bites hard into investor resources and confidence, so they have become much more likely to forget cute punts on smaller companies and throw in their lots with bigger, so-called safer, firms.

Some small groups are winning, however. Ascribe, which sells IT to the healthcare industry, announced stellar full-year results yesterday. Its pre-tax profit for the year to June was up 28 per cent to £3.8m, with earnings per share up 20 per cent at 2.49p.

The shares are cheap too. Watchers at Cenkos pointed out that the stock was trading at more than 60p just over a year ago. If buyers need further evidence of the stock's value, they should consider that board members are still engaged in what might eventually become a management buyout.

Even though the dividend has been suspended, Ascribe has promised to backdate any payments if directors eventually take the group private. There is also likely to be a boost in the share price should a firm bid be confirmed. There are not many Aim companies that present a compelling investment case but punters who snap up Ascribe's shares might discover they have found one. Buy.

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