Investment Column: Good results but be careful with Spectris
Morgan Sindall; Ashmore Group
Wednesday 25 February 2009
Our view: Cautious hold
Share price: 434.5p (-57.75p)
The investment case for buying Spectris shares is, to paraphrase its chief executive John O'Higgins, a punt on the global recovery.
It is generally true that stock markets tend to show signs of recovery faster than other economic indicators, but it will not be lost on investors that on Monday the Dow Jones closed at its lowest level since 1997.
The FTSE 250-listed electronic instrument and control maker issued its full-year results yesterday, which ostensibly looked very good: adjusted pre-tax profits were up 12 per cent and the company increased its dividend. Growth in Spectris's key emerging markets operations, especially in Asia, is impressive.
A closer look at the results, however, may go some way to explaining why the shares were down 11.7 per cent yesterday. According to Numis, organic growth in the fourth quarter was down 4 per cent and the company did not include a forecast in its outlook statement yesterday, except to say that "current market conditions continue to be challenging and offer very limited visibility".
We do appreciate that the group is doing what it can to offset the effects of the recession, and that growth in most of its markets is strong. We think, however, that the outlook is soft and that ultimately it is not the right time to be buying Spectris stock.
The Numis experts argue that the shares, trading at 7.7 times earnings, are in line, which offers solace. Cautious hold.
Our view: Buy
Share price: 479p (+19p)
Morgan Sindall has a problem. And as a result, so do its investors. The fact is that the company is performing well, despite being at the heart of the toxic construction sector. The market is not listening, however, and the shares are down 56 per cent in the last 12 months. This does not tally with what the company said yesterday as it announced its full-year results, with revenues, pre-tax profits and the dividend all up.
So why is the stock performing so poorly? The company said that 2009 would be tougher, although with 70 per cent of projected revenues already booked, which is on a par with last year, the outlook is not that bad.
"It is a communication issue," says the executive chairman John Morgan, who blames the fact that the group operates in several markets, some of which are not performing well, for the stock's tepid performance.
It is true that divisions such as "fit-out", which refurbishes City office space, are not firing on all cylinders, but others, such as its infrastructure arm, are making record returns. On the plus side, the stock is cheap: Panmure Gordon's watchers advise their clients to buy the stock. "The forward price-earnings ratio of 4.9 times... is a reasonable discount to the sector average of 7.4 times.... Applying a 7.7 per cent dividend yield assumption, still a premium to the sector, generates a new target price of 540p, or a 17 per cent upside," they say.
Investors cannot be expected to cover for a company's poor "communication" strategy. However, Morgan Sindall is performing well in growth markets such as infrastructure and perhaps the yield is too attractive to ignore. It is not a safe buy, but we think Morgan Sindall may be oversold. Buy.
Our view: Hold
Share price: 107p (+6.25p)
The dire financial markets are an opportunity for a group like the emerging markets asset manager Ashmore, says the group's finance director Graeme Dell. With more distressed situations on offer, a punt now could be hugely beneficial in one, two or three years' time, he adds. Despite Mr Dell saying that the group was pleased with yesterday's interim results, and that they beat most other asset managers, they were still below most analysts' expectations, with pre-tax profits down £20.6m at £80.3m. Worse still for investors, the shares have performed woefully in recent weeks, including a 25 per cent drop in the last month alone.
Mr Dell refutes the suggestion that clients are opting for asset classes without exposure to the emerging markets, despite the group's assets-under-management falling by more than 34 per cent in the first half of the current financial year.
Despite the numbers not being great, we rather like Ashmore's bullishness and after saying sell last September, when the stock was at 210p, we are tempted to change that. Watchers at Singer acknowledge that while the shares have been weak recently, they are now trading at 6.4 times earnings per share, and on a maintained dividend, offer a yield of 11.9 per cent, making a punt worthwhile. We are more cautious, but think Ashmore is certainly worth holding. Hold.
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