Investment Column: Hogg's is cheap, but the risks are very high

Shaftesbury; Chrysalis Music
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The Independent Online

Our view: Speculative buy

Share price: 29p (+0.75p)

For investors, Hogg Robinson presents something of a dilemma. The visibility of its earnings are about as cloudy as the economic sky, and it's likely to remain that way for some time. The business travel arranger's results this year at least offer some positives. Despite a fall in revenues (down 7 per cent to £326.8m), costs cuts have enabled the company to post a 15 per cent rise in pre-tax profits to £28.4m, although that is flattered somewhat by the fact that last year's numbers included hefty one-off restructuring costs. At the operating level, profits were up just 1.7 per cent.

A major concern with Hogg's is the fact that the company is going to have to renegotiate its financing – the current facility lasts only until September 2011, and the cost of it both in terms of interest and up-front fees is likely to rise sharply, reflecting the harsher climate. There are certainly signs that the outlook for business travel is starting to improve. The question is, however, whether it will improve sufficiently to offset the increased financing costs. That's a tough question to answer. The economic climate looks less positive than it did a couple of months ago, not least because of the ongoing eurozone debt crisis. There is a risk that the pick-up could be more modest than Hogg's had hoped.

On the plus side, the cost base is reflective of the new reality and the increasing trend towards online booking will mean that, as business does improve, costs may not rise at the same rate. The house broker, Collins Stewart, has the shares on just 4.7 times 2011 earnings, which is cheap on the face of it, and the forecast yield, at 4.2 per cent, is respectable, with the current dividend well covered.

If the projections for a recovery in business travel prove to be well founded, then Hogg's could offer exceptional value. But the risks and uncertainties are substantial. So we would suggest a speculative buy only for those with strong stomachs.


Our view: Hold

Share price: 361.8p (+6.8p)

Property companies have been doing well of late, with updates from the likes of British Land and Land Securities lifting the mood among investors. Shaftesbury continued the trend with its half-yearly figures yesterday, though unlike bigger peers who deal in offices and malls, its business is focused on shops, restaurants and other smaller units around the West End of London. So when it comes to gauging demand for Shaftesbury's properties, investors must pay attention to the flow of visitors to fashionable haunts such as Covent Garden and Charlotte Street. For now, the company says that consumer spending across its locations "remains buoyant". Shaftesbury is financially strong, and is confident of its portfolio delivering growth in capital and rental values.

But while we agree about the long-term prospects, we worry about the short-term picture. We wonder if the West End will be able maintain its resilience in the face of public-sector cuts in the UK and what looks like a growing sovereign debt crisis in Europe. Consumer spending may ebb as economic challenges stack up.

Weighing against that bearish view is Shaftesbury's valuation, with the shares trading at a 12 per cent discount to Evolution's September 2010 net asset value (NAV) forecast. Historically, they've traded at a premium, so this is not one to sell. However, given the economic uncertainties we'd just be holding for now.

Chrysalis Music

Our view: Buy

Share price: 98p (-1.5p)

Many dream of back-to-back number one singles in the US. With writers responsible for Rihanna's "Rude Boy" and Taio Cruz's "Break My Heart", the music publishing group Chrysalis Group achieved exactly that, and the good news didn't end there. First-half results were met positively by the market. Normalised operating profit rose from £1.4m in the six months to the end of March 2009, to £2.6m. Revenues also rose from £31.2m to £32.7m. Success was driven by writers of songs including Kylie and Robbie Williams. Non-publishing revenues were bolstered by the remastered Beatles albums.

The chief executive, Jeremy Lascelles, called the performance "pleasing" against the backdrop of a volatile recording industry. The start to the second half of the financial year was "encouraging," he said, after the chart success of Laura Marling and Broken Bells. The company expects more consolidation after buying First State Media in April and looks strong. Investec has its 2011 enterprise value at 15.9 times earnings (before interest, taxation, depreciation and amortisation). Not hugely cheap, but there's more to come. Buy.