Investment Column: Hold Hays for divvy and overseas growth

First Group; Galliford Try
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The Independent Online

Our view: Hold

Share price: 95.15p (+4.6p)

It was a better update from Hays than might have been expected given the continuing economic uncertainty here and in Europe. Happily for investors, the recruiter's reach extends well beyond these shores to places where the economic climate is altogether sunnier. Hays now generates 60 per cent of its net fee income from overseas, a good thing given that the UK and Ireland remain in negative territory with public spending cuts likely to keep it that way for some time.

Even on those vacancies Hays is called upon to help fill it will probably have to pay less, which is no bad thing for the taxpayer. One of the factors that makes Hays an attractive investment is that its services are not cheap. The private sector should help to cushion the UK business to some extent, but it is not yet clear by how much.

Still, the update took the eye because Hays' overseas businesses mean that it has returned to like-for-like growth for the first time in a couple of years. And Asia's performance was excellent: growing at 53 per cent overall and 28 per cent on a like-for-like basis when compared to the second quarter of last year.

Continental Europe, too, grew by a fifth, although it is by no means clear that this will continue.. There are reasons to be concerned about the rise of the recruiters: surely companies ought to know their businesses well enough to know the type of people they want. The same applies to the public sector. Nonetheless, while net debt of £80m is higher than we would like, the company looks in reasonably good shape. We weighed up recommending a sell at 104p in February, and that might have been a good call.

However, what kept us in was the prospective yield, which is now over 6 per cent. We are more confident about Hays now, and it might even be worth buying a few given the way the overseas businesses are going. However, while economic uncertainty abounds, we remain holders for now.

First Group

Our view: Buy

Share price: 381.9p (+7.2p)

First Group is a tricky call. Yesterday's first-quarter trading statement, published alongside the transport group's annual meeting, stressed current performance in line with management expectations and a continuing focus on controlling costs and increasing cash generation. There has also been good news in the recent disposal of GB Railfreight, sold to the Eurotunnel subsidiary Europorte in June. The £31m proceeds will pay down debt.

Yesterday's statement also said that the company is expecting to achieve "moderate earnings growth" against a backdrop of challenging trading conditions. But the grim economic background to First Group's UK trading operations cannot be easily dismissed.

Revenues may be back on the rise in the post-recession bounce, but the impact of public spending cuts may well push consumer spending back down. Worse still, the Department for Transport is tipped to be one of the biggest losers in this autumn's spending review. Subsidies to rail franchise holders such as First Group could well fall. There are also pressures on the other side of the Atlantic, with flat revenues from the group's First Student business. But on balance, First Group's cost-cutting and margin-boosting measures just about convince. With the stock down 10 per cent over this year, there is room for a punt. Buy.

Galliford Try

Our view: Sell

Share price: 312.75p (+7.75p)

Galliford Try adopted a glass-is-half-full approach to its full-year trading statement yesterday. The construction and housebuilding group said full-year pre-tax profits will be at the upper end of estimates, after a strengthening of house prices and its construction unit performing well. In fairness, we would have to agree that the group looks to be in rude health: net cash, for example, at £75m, is much better than the £34.1m this time last year, and well ahead of expectations.

There is a problem, however. The company says that it has anticipated the public spending cuts on the way. With the Government expected to announce savage cuts in the autumn, we argue that the group can't possibly have accounted for every eventuality, especially as it relies on government contracts for about half of its revenues.

There is a compelling investment case, and after the group announced that it would focus on the improving (for now) housing market, it looks cheap on a 2010 price to earnings ratio of 12.2 times. The dividend yield, at 3.5 per cent, is respectable. But we would be inclined to agree with the nervous market that has sent the shares down by nearly 6 per cent in the last month. In February we were holders at 313.5p. We're sellers now.

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