Investment Column: IG needs to deliver on promise of growth
Halfords; PZ Cussons
Friday 10 June 2011
Our view: Hold
Share price: 439.4p (-0.6p)
IG Group announced a management rejig and the closure of its sport-betting business yesterday along with its end-of-year trading statement.
The moves signal a welcome decision to concentrate on the spread-betting company's core financial business and to expand it in new markets and make use of new technology.
The sports business has dwindled to less than 3 per cent of sales from about half of revenues back in 1999. It made a small profit last year but only because of increased activity during the football World Cup, an event that drove trade for all manner of companies across a variety of sectors.
Andrew MacKay, the group's former head of international development, is heading back from Asia as director of corporate strategy to drive geographic and product expansion.
Profit before tax, excluding goodwill amortisation and impairments, is forecast to rise 3 per cent to £163m. That's a fairly modest increase for what is still seen as a growth stock.
Revenue at the core UK business was up 3 per cent, lagging the 7 per cent growth across the group. The UK still has some scope for growth because IG can spend more on new technology, such as smartphone apps, than others in what remains a fragmented market.
But an investment in IG is a bet on the company's efforts in overseas markets, and particularly in Europe, which is less than a third the size of the UK business divided over six countries.
The European business increased revenue by 21 per cent to £58m, powered by Germany. A growing business in Europe's biggest economy is certainly an enviable asset, but it is still dwarfed by the mature UK business.
IG seems to be caught between classification as a growth stock, for its overseas operations, and a yield investment, based on its cash-generative but less racy UK arm.
It is clearly a good business but if we invested today it would be for the dividend yield of about 5 per cent with the promise of growth still to be borne out. Well worth keeping tabs on, in our view, but for now we would rate the shares a hold.
Our view: Hold
Share price: 405.9p (+8.1p)
It is well known that, at the slightest hint of sun, people up and down these isles think nothing of rushing into the great outdoors, bringing just a sheet of tarpaulin for protection.
It was, then, no surprise when Halfords put out its full-year numbers yesterday, revealing that recent trading had been boosted by punters hurrying off to camp during Easter.
Pre-tax profits rose 7.2 per cent to £125.6m for the year to the end of March. In the nine weeks to the beginning of June, leisure sales rose 11.1 per cent, with Easter providing a 1.5 per cent bump.
Not so pretty was the 10 per cent drop in its "car-enhancement" division, which sells everything from seat covers to boost gauges. Car maintenance was also 3 per cent lower as the good weather meant it sold fewer wiper blades.
Analysts at Espirito Santo reckon that the trade figures look "OK", adding that the comparative numbers ease considerably over the rest of the financial year. The company looks to be in a strong position with debt a third lower at £103.2m, and a share buyback under way.
The shares trade on a rating of 10.4 times estimated full-year numbers. That looks pretty cheap, but with an uncertain outlook for the retail sector – and indeed the weather – we would counsel caution.
Our view: Hold
Share price: 376.6p (+6.8p)
Yesterday's update from the maker of Imperial Leather soap and Carex handwash was reassuring in that, overall, PZ Cussons said performance for the year to the end of May had been in line with management's hopes.
The news from Nigeria was good, with business improving during May following the elections, while Asia as a whole "continued to perform well, with the positive momentum in Indonesia" continuing to deliver growth. The UK and Europe, on the other hand, proved uninspiring.
The latter is not surprising. And if anything, PZ Cussons is better placed than other consumer-related companies in that it has the benefit of good international operations. That said, it trades on more than 20 times forward earnings. We would not buy, but nor are we inclined to sell.
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