Investment Column: Hold Reed Elsevier as a longer-term punt
Ladbrokes; Morgan Crucible
Friday 19 February 2010
Our view: Hold
Share price: 486.2p (-7.3p)
Investors in Reed Elsevier will be hoping this year proves a little less eventful than 2009. Parts of the media group's business where smashed by the economic downturn and its chief executive, Ian Smith, left after just eight months when the board decided he wasn't right for the role. The new boss, Erik Engstrom, gave his first results presentation yesterday as Reed trumpeted a "robust financial performance in [an] unprecedented global recession".
Revenues hit £6bn – flat at constant currencies – but pre-tax profits fell by 6 per cent. Of its core businesses, the professional information arm Elsevier held up "relatively well" as revenues rose 9 per cent. Those at the Lexis-Nexis database rose 14 per cent.
The problems were at Reed Exhibitions, whose revenues fell 28 per cent because it had fewer paying customers as businesses cut marketing spend. Reed Business Information was also hit, with revenues falling 35 per cent during the worst advertising slump in living memory.
The parent company itself admits that now is not the time for short-term investors to buy in. Anthony Habgood, the chairman, said: "The late cycle nature of some of our markets makes for a tough environment in 2010."
However, he argued that Reed was a long-term recovery play because the fundamentals of its businesses were strong, its balance sheet was in good shape and new managers were in place who had the experience and ambition to drive it forward.
The company also hopes the rate of decline in advertising is also slowing, and it is targeting growth markets to lift revenue. It cut costs by £227m (not as much as some had hoped) and also reduced its debt from £5.7bn to £3.9bn after an equity issue last year.
Numis has Reed's stock on what it calls an "undemanding" 12 times estimated 2010 earnings but agrees that the pressure on the company will continue in the first half of this year, before comparatives ease in the second half. We would sit back and hold until Reed Elsevier's prospects look better.
Our view: Hold
Share price: 151.1p (- 5.5p)
Ladbrokes took a kicking yesterday after what looked like a dispiriting set of results. Its revenues fell to £963.7m from £1.05bn a year ago, while profits before tax dipped from £265.6m to £191.3m. The bookmaker has faced a bit of a perfect storm: punters have been betting less during the recession, but they have been winning more, at least on football matches where the effects of a surprisingly low number of draws in the Premiership have been well documented.
All that and no final divvy thanks to this year's rights issue, which did at least cut Ladbrokes' debt pile. It does not look pretty on the face of it and the company must also find a chief executive as well for when Chris Bell leaves.
But there are some hopeful signs for Ladbriokes, however. Its results were at the top end of the range thanks to a strong fourth-quarter and good takings from high rollers.
Last month's terrible weather was not kind because it decimated the racing programme – but Ladbrokes' profits will actually be ahead and it has pruned its costs. We like its loyalty card scheme (if Tesco can do it, why not a bookie) and see potential for a turnaround as economic woes ease and people feel a bit freer with their cash.
The shares are not cheap. Collins Stewart has them on 13.1 times forecast 2010 earnings, much more expensive than, say, William Hill. But we see enough potential to continue holding.
Our view: Buy
Share price: 169.5p (+3.5p)
Yesterday's full-year results from Morgan Crucible were a rather mixed bag. The manufacturer of carbon and ceramics materials reported that its revenues were up 13 per cent at £943m but its pre-tax profits dropped by 45 per cent as margins narrowed from 13 per cent to 9.4 per cent.
On the plus side, net cash flow was 21 per cent higher, helped by a near-£40m debt reduction to £253m. Even more importantly, there was noticeable improvement in the second half of the year, as the company's cost-cutting measures boosted its margins from 9.2 per cent to 9.7 per cent.
But it is still tough out there. Mark Roberts, the chief executive of Morgan Crucible, described the past year as "the most challenging environment for industrial companies in decades".
The prospects for next year are only tentatively rosier, he said, with early signs of an improving order book but, significantly, he believes it is premature to be calling a recovery "just yet".
It is tough to argue with the analysts at Panmure Gordon, who said Morgan Crucible's results "lacked inspiration". Nevertheless, it is securing more orders and the stock does look undervalued, given that margins are also on the up.
The shares trade at a shade under 12 times 2010 earnings and could enjoy a re-rating once sales growth kicks in. That might not be as far away as the sceptics think, and Mr Roberts may be "managing expectations". Buy.
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