Investment Column: Economic outlook clouds the M&C case

Modern Water; RSM Tenon

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The Independent Online

Our view: Hold

Share price: 404.7p (+4.7p)

Millennium & Copthorne hasn't had the easiest of rides in recent weeks. Go back to the start of August and the hotels group's shares were changing hands at levels of over 500p apiece. Nowadays, however, they are worth closer to 400p.

A glance at the company's interim management statement in early August doesn't go very far in explaining the slump. The update showed that pre-tax profits in the second quarter were up more than 90 per cent, while revenues per available room - the key industry metric - were up 4.6 per cent (or more than 6 per cent in constant currency terms).

The latter was mostly down to an increase in average room rates, and was up strongly - in some cases by double digits - when it came to major metros like London and New York.

The update also brought news of improving finances. Millennium said its net debt had declined to £81.9m at the end of June, down from £165.7m. Cash reserves at the end of June stood at £335.6m These figures answered any questions about the balance sheet.

On the outlook, Millennium was cautious about the crises engulfing the eurozone and the US, but it did point out that 60 per cent of its earnings were concentrated in Asia.

Nonetheless, the share price fell. We suspect that the weakness is likely to have been inspired by the market-wide sell-off. That said, there was change at the top, with the company naming Wong Hong Ren as chief executive earlier this year, "the fifth in as many years", according to Jefferies. But the market knew that before the shares began falling.

In the end, we think the case turns on the economy. Although Millennium has much going for it, another global downturn will hinder progress in the share price. The prospect alone has played havoc with sentiment. And the mood may yet darken if economic indicators tank. The company's strengths - and the affordable valuation of around 11 times forward earnings for next year - mean that we would not sell. But the market jitters - so obvious in the recent movement of its share price - mean that we would wait before checking in.

Modern Water

Our view: Buy

Share price: 48.5p (+3.5p)

Modern Water seems to have carved out a potentially lucrative niche in an area that is only going to get bigger with the battle for fresh H2O set to intensify in the coming years.

The Aim-listed desalination and water monitoring company, which has commercialised the process of "manipulated osmosis technology" developed by the University of Surrey, has just reported a 430-fold surge in revenues for the first half.

Soaring revenues of £430,000 notwithstanding, Modern Water still clocked up a £2.1m loss for the period, but executive chairman Neill Macdougall was in bullish form. And the market agreed with his optimism, sending shares up by 7.8 per cent.

Modern Water's technology works by sucking salt water through a membrane at low pressure, cutting the cost of desalination in a relatively efficient process that also happens to be more environmentally-friendly than the alternatives.

Having recently won the world's first commercial contract to build a desalination plant using its patented technology in Oman, with a gross profit margin of 33 per cent and a debt-free balance sheet holding £16.7m of cash, Modern Water looks to be in fine shape and well worth a punt.

RSM Tenon

Our view: Hold

Share price: 21.75p (-3.25p)

We opted to buy RSM Tenon in July, when the accountancy group was trading at levels far beyond last night's closing price. We'd moved in on the back of a share price fall that had left it looking undervalued.

The market, however, decided otherwise. In our defence, yesterday's full year results did not bring the sort of bad surprise that you might have expected in light of the slump.

In fact, RSM reported better than expected profits. But there was a note of caution in the outlook, with the company citing a "challenging business environment". That is to be expected, given the way economic indicators have been going.

But the fact remains that, if RSM looked undervalued earlier this year, it looks downright cheap now. Given the recent performance, we would not add to our holdings, but at around 4 times forward earnings, we would maintain our stake in the hope of a rebound.

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