Investment Column: Hold on to Arm, it deserves its high rating

Braemar Shipping Services; Vislink
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The Independent Online

Our view: Hold

Share price: 150p (+0.8p)

Arm Holdings may not be hugely familiar to the public, yet its silicon chips can be found in everything from Nintendo's new handheld DSi console to Dell laptops and Apple's iPhones.

The Cambridge semiconductor group designs and licenses the chips and is particularly strong in the mobile phones sector, with clients including Nokia and Samsung, because its products consume a relatively low amount of electricity.

This market represents a strong opportunity for ARM, especially in the smartphones sector – the growth of which has been given a huge boost by the iPhone. In fact, it was the only segment of the market to grow throughout the recent economic crisis, demonstrating its resilience.

Arm issued third-quarter numbers yesterday which showed that it has outperformed its peers. While its revenues fell by 8 per cent to $123m, the industry as a whole was down 18 per cent. Arm said it was making good progress beyond mobiles with "next-generation processors" used in digital televisions and hard disk drives. The long-serving chief executive Warren East was in bullish mood, calling it a "good quarter" for the group. He said: "Once again we have demonstrated the resilience in the Arm business model; our improving revenue and disciplined cost control has delivered a sequential improvement in margins and profitability, as well as a high level of cash generation."

The company's shares have risen 10 per cent this month and the increase may have run its course for the moment, especially after City support for the third-quarter results. Arm is on a pretty rich valuation of 30 times full-year earnings (according to Panmure Gordon), given that the industry is not out of the woods yet. But Arm is likely to be in a good position to benefit when the market recovers. For that reason, we say the shares are worth holding.

Braemar Shipping Services

Our view: Buy

Share price: 395p (+13p)

At first glance, yesterday's first-half numbers from Braemar Shipping Services did not look inspiring: revenues were down by more than 17 per cent and pre-tax profits by more than 28 per cent. But such falls should come as no great surprise. Shipping was decimated by last autumn's economic crash, with the Baltic Dry Index – which tracks the price of transporting bulk cargo – plummeting to less than a tenth of the previous May's high.

Also in Braemar's favour, comparison of the latest financial results with the second, post-crash half of last year, makes for a more optimistic picture. Half-on-half, pre-tax profits are up by about 7 per cent to £7m and earnings per share of 24p show a 5 per cent rise. The company also has a strong balance sheet to recommend it, with £9.8m of cash and no debt. And while the transaction values in its broking business are still way below what they were, at least the volumes are back up to pre-crunch levels. Together with this, a long-standing strategy to add less cyclical services such as engineering and naval architecture to its core broking business is further helping to smooth any ups and downs.

Braemar's shares have gone up by just 6.6 per cent over the past three months, considerably below the FTSE All-Share Index. But with a yield of 6.5 per cent, and trading on a price-to-earnings ratio of 8.6 times full-year forecast earnings, compared with about 10.6 times for the wider industrial transportation sector, there looks to be value in these these shares. So Buy.

Vislink

Our view: Speculative Buy

Share price: 23.73p (-0.53p)

Vislink specialises in high-tech communications and surveillance equipment. It is not inconceivable that a broadcast journalist could use Vislink's products to transmit pictures from a troublespot while local law enforcement officers use its other kit found in mobile command vehicles and helicopters – for example, high-definition surveillance cameras – to keep an eye on them.

The company has not been without its problems in recent years: a look at its three-year share price chart shows a nasty slide – and the shares been shaky recently. So if you invest, you are basically taking a punt on whether Duncan Lewis, the recently appointed chief executive, can turn the business around. Wiith net debt of £2m and a pledge to generate cash this year, there are companies in worse shape and the rating of Vislink's shares – 5.9 times 2000 forecast earnings , falling to 4.4 times next year – is undemanding. Mr Lewis has focussed Vislink on news, law enforcement, marine and energy. We are willing to give him the benefit of the doubt with a buy, but it is a speculative one – so handle with care.

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