Investment Column: Feeling lucky? Have a punt on JJB Sports

Shanks Group; Western & Oriental
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The Independent Online

Our view: Speculative buy

Share price: 30p (+2p)

If you are a cautious investor who has quite sensibly avoided anything racy in the past year or so, you might as well stop reading at this point. But those still with us: hold on to your hats because JJB Sports is not a punt for the faint-hearted. On any measure, yesterday's interim management statement was a litany of horror. Not only were revenues 42.1 per cent lower in the 16 weeks to 17 May than at the same point last year (when they were hardly fantastic), the gross margin also fell by 580 basis points. The only bright spot yesterday was a 7.1 per cent rise in the shares.

"We believe the decrease in like-for-like retail sales is largely as a result of low stock levels, the negative is publicity which has surrounded the company and the current retail environment," JJB said in a statement.

So why would you ever buy the stock? The executive chairman, Sir David Jones, reckons the only thing now standing in the way of a return to health for JJB is if he and his team "cock it up". He points out that the group's finances are slowly being nursed back to health after JJB secured backing from creditors and shareholders for a company voluntary arrangement, a rare insolvency process that will help the retailer stay in business. This arrangement, which was organised a few months ago, has led to an impressive leap of 166 per cent in its share price as white-knuckle punters smell a bargain. For those looking for an adventure, the stock is still very cheap.

Sir David, who says it will take at least a year before JJB gets the right stock on its shelves, does not rule out a rights issue to further shore up the company's books. He does insist the fightback is on, however, and pleads with investors to "give us a chance".

If the group does survive, the stock is sure to jump and investors will be in clover. In that case, buying now could be a great decision. It could still go very wrong, however. Speculative buy.

Shanks Group

Our view: Buy

Share price: 99.5p (+8p)

The waste management group Shanks surprised the market yesterday, announcing a two-for-three £71.4m rights issue, which it says will be used to cut its debt pile and strengthen its balance sheet. Investors, we think, should be encouraged. The cash call is not being done as a last resort to save the group, and anyone not convinced should take heart from the stock trading up by 8.7 per cent yesterday.

The shares have been stunted by the group's debt burden, and the promise is that the cash will be used for preservation rather than acquisitions. Shanks's overall net debt stands at £290m before the rights issue cash comes in and we agree it is too much for a company with a market capitalisation of just £218m. Incidentally, the debt has not stopped the stock climbing by nearly 60 per cent in the past quarter. Indeed, watchers at Blue Oar say investors should consider debt an issue of the past. They note: "Balance sheet issues are now well and truly behind it and the new CEO [Tom Drury] is starting to make his mark. With flexibility returning to the balance sheet, this should enable Shanks to bid for further PFI projects and transfer waste management technology from the Continent to the UK."

Economic conditions are tough, but we reckon waste management and recycling are growth areas, especially since the Government has announced an increase in landfill taxes.

Investors can also rely on hard evidence, with Shanks posting an 8 per cent jump in annual pre-tax profits yesterday. We reckon the stock, which trades at six times earnings, still has a way to go despite the impressive rises over the last quarter. Buy.

Western & Oriental

Our view: Hold for now

Share price: 3.6p (+0.1p)

A raft of hotels operators have put out some miserable results in the past few weeks, with most lauding the fact they have a middle-market offering to compensate for tricky upmarket sales. That makes yesterday's half-year results from Western & Oriental all the more surprising. The posh travel agent said it had swung into profitability, albeit by only £100,000, in the first half of its financial year, after reporting a £2m loss a year ago.

The reason, the company says, is a result of its radical cost-cutting drive, with administration expenses and central costs down by 31 per cent and 21.6 per cent, respectively. Analysts at Collins Stewart point out that the market capitalisation is now lower than Western's net cash position. We applaud the lengths the company has gone to but would still be nervous about companies this small, in what is still a tricky sector. Keep an eye on the shares. Hold for now.

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