Investment Column: Genus offers seeds of farming recovery
Stobart Group; Dimension Data
Thursday 13 May 2010
Our view: Buy
Share price: 724p (+4p)
The betting must be that there are few people who can claim to have ever met a farmer who says business is booming, but an update yesterday from animal breeding outfit Genus would suggest otherwise. The company said that it had traded in line with expectations during the first four months of the year, and that in some markets, particularly Latin America and China, sales of products such as dairy semen, of all things, was booming.
It is also worth nothing that there was plenty of support among analysts for the group. They pointed to the recovery in porcine markets as a reason to get excited, with those at Panmure Gordon arguing that the tone of yesterday's statement was more positive than previous updates.
Backers of the group have seen only a mild increase in the share price in recent months, and the dividend yield, at 1.7 per cent, is nothing out of the ordinary. Agricultural markets have suffered in recent years, and investors would be right to be nervous about the recent performance of the shares, which have limped along, managing to put on just 4 per cent in the last quarter. Undoubtedly, there are more exciting shares on the market. Nonetheless, a number of analysts yesterday upgraded the company. The team at Panmure Gordon said that the stock would reach highs of 800p, while those at Morgan Stanley aimed a little higher, arguing that the stock could climb to 810p.
We agree with the bulls. Hitting the 800p target would see the shares trading on a multiple of 20 times forecast full year earnings, which while not cheap, is not excessive either. We would argue that Genus has been somewhat overlooked by the market and that the recent high marks from analysts will boost the stock. Buy.
Our view: Hold
Share price: 155p (+4.9p)
Stobart is one of the more visible of Britain's mid cap stocks – with the garish green livery of its lorries a fixture on Britain's road network. The group has also pushed into other areas including trains and planes – we may even see the Stobart name on passenger jets flying out of Essex if boss Andrew Tinkler gets his way.
From a strictly financial point of view there was much to like about yesterday's trading update. Pre-tax profits surged to £34m from £22m while net debt was cut by £57.9m since the interim date and by £23.8m since the last year end. The normalised profit number was a less impressive £28.6m, but the earnings are still rolling in and were in line with expectations.
Analysts too were giving the group some praise. Investec noted recent contract wins, gains on assets and a strong performance. Indeed the group's resilience during the credit crunch is highly creditable and as the economy recovers, it should continue to pick up. Wade in then?
Well, perhaps. Stobart is an unusual company and has raised eyebrows in the past with deals involving companies owned by its directors. Investors very much have to accept it for what it is and settle in for the ride, which may have a few bumps. The shares are not exactly cheap at the moment either, trading on 15 times the forecast numbers for 2011, although the yield is healthy enough at 4.7 per cent. But overall, the business does have momentum, so we say hold.
Our view: Hold
Share price: 100.5p (+6.5p)
Dimension Data's revenues were down 3.7 per cent in constant currency in the six months to the end of March, which was generally viewed as "solid" by the analyst community.
Management blamed weak trading conditions in telecoms operator Plessey and lower revenues at Express Data. It also said the numbers were up against a particularly strong first half in the previous financial year, before the global financial crisis really took hold. But it wasn't all bad news. The FTSE 250 listed technology group's main strength was in the US and its move to managed services looks to have paid off as revenues rose 10 per cent in the first half.
Dimension, a global partner of Cisco, is also generally optimistic and believes clients are ready to spend on IT and IT services again after the downturn. They added that single digit revenue growth for the full year is achievable.
Altium Securities has the stock on a price of 17.3 times estimated full year 2010 earnings and management is bullish about a forecast of 10 per cent revenue growth in the next three to five years. However, all that said, at the moment, there is little here to change our feelings that this looks steady as she goes. So hold.
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