Investment Column: Greggs soothed by appetite for value

Carillion; Wood Group
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The Independent Online

Our view: Tentative hold

Share price: 3,209p (-217p)

The pasty and sausage roll seller Greggs prides itself on its budget nosh for the masses, as its adverts starring the earthy Northern comic Paddy McGuinness tacitly imply. It hasn't had the best of years so far, but the market conditions could well make it one of the stronger performers in its sector.

The group produced a disappointing interim management statement yesterday, the first under the watch of the new chief executive Ken McMeikan, who joined in July. It lowered its profit guidance by £3m, about 6 per cent lower than analysts' estimates.

Greggs suffered as it is relatively weather dependent. Of its sales, between 60 to 70 per cent come at lunchtime and any rain keeps punters out of the bakery. This was exactly what happened in August and September. As wheat costs, among others, rose, the firm was desperate to maintain its "good value" selling point and not pass the increase onto its customers. This hit margins in the third quarter.

There could be some good news in the gloom. Sales showed some resilience to the deteriorating economy towards the end of the September.

It could also win from the "trading down" factor. Uniq, the food supplier to Marks & Spencer, this week admitted the customers are giving up posh sandwiches for cheaper fare. This is where its emphasis on value – read cheapness – could position it well, as punters give up their Tuscan focaccias and tuck into a sausage roll instead. After today's share price falls on the profit warning, the stock might well be worth holding onto in the medium term.


Our view: Tentative buy

Share price: 263.5p (-4.5p)

Construction companies may not look like a good bet at the moment, but Carillion has a strong order book, comforting international diversity and net borrowing that will come in below the £300m target by the end of the year, according to yesterday's third-quarter management statement.

Perhaps surprisingly, given the wider economic situation, Carillion's construction division is doing well, with 28 per cent organic order growth in the first half, and £100m of business in the education sector announced earlier this week. Support services are also boosting the group's performance and the division is on track to meet targets for revenue margin growth of between 4 and 5 per cent. Public-private partnership (PPP) programmes are particularly strong. Two such investments were sold, early, this year, pushing the total income from PPP over the past five years to £179m in cash and £104m of pre-tax profits.

But Carillion's main strength is its international growth. The Middle Eastern business is the big winner with City analysts. Some £200m of new orders in the region were announced this week, and the company aims to nearly double the division's revenue in the next two to three years. Picking up Canada's Vanbots Group for just shy of £15m this week adds to the sense of healthy international growth.

Carillion is a tentative buy.

Wood Group

Our view: Buy

Share price: 2,77.75p (+25.5p)

Notwithstanding the blood on the floor of every major stock market this week, there is still investment potential out there. Wood Group, which provides engineering products and services to the energy sector, is a case in point. Oil prices may have fallen considerably from the all-time $147 per barrel high in early July, but there is still little chance of the appetite for oil dropping any time soon, and gas demand is also on the up as the environmental agenda continues to gain political support.

Wood Group has added some 3000 staff in the past 12 months, taking its workforce to 28,000 globally. And the interim management statement published yesterday emphasises that the demand for both services and products remains high and trading in 2008 has been strong. Wood's finances also look sound. It has bank facilities of about $1bn (£577m) that are committed to July 2010 and the company is anticipating good working capital performance in the second half.

Oriel Research is predicting strong earnings-per-share (EPS) growth this year and next. "Our forecasts of 52 cents and 61 cents adjusted EPS for this year and next remain unchanged," the group says. "Given the resilience of demand for energy services and growth prospects, we continue to believe that the shares, on a 2008 price-earnings ratio of 8.5x, are exceptional value."

Nothing is certain in this uncertain world, but Wood Group is a definite buy.