Investment Column: Mouchel makes impressive metamorphosis

Homeserve; Hilton Food Group
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The Independent Online

Our view: Buy

Share price: 296.5p (-21.5p)

Mouchel is a funny old beast. It wants very much to be known as an outsourcing group, which with the local government and companies desperately trying to save costs and ward off the recession, is a pretty good place to be.

Sadly for Mouchel, some of the market still regards it as an engineering consultancy, and that can have a drag on its share price. Yesterday's news that Mouchel's performance in its government services division, the main market it is targeting, has been a little soft did not help the stock.

In fairness, the company is making strides in convincing the market that it is a different company to the one it was a few years ago. Several analysts applauded the group's interim results published yesterday, which showed an impressive first-half profit hike of 25 per cent.

Those at Citigroup argue that Mouchel is "a cheap BPO [business process outsourcing] company or an expensive consultant – a 2009 price-earnings ratio of 10 times represents a significant discount to BPOs, which we see as more appropriate comparators, but a premium to the more cyclical consultants."

Mouchel is rightly trying to move into the less cyclical outsourcing business and away from the slightly shakier engineering consultancy sector. It will take a while for this process to be completed, and there will be hiccups along the way, such as the group announcing yesterday that it is disappointed by the number of big contracts it has missed out on in the past six years.

The group is a good performer, however, and investors should buy now while the stock is relatively cheap.

Homeserve

Our view: Buy

Share price: 1170p (+85p)

Business is a marathon rather than a sprint and, as in all long-distance races, a winner can have several stumbles on the way to the finish line.

Back in November Homeserve, the contract home maintenance and insurance group, suffered such a stumble when it issued a warning saying that operating profits would miss expectations and that it was concerned about the number of customer renewals. The stock had a full-scale fall, dropping from 1,219p to 840.5p in just a few days.

Fast forward a few months and Homeserve is leading the pack again. In a trading statement issued yesterday, it said that renewals were no longer a problem and that it now expects to hit the upper end of its revised profits guidance, at about £96m.

The stock has been a bit wet in the last few months, but was up 7.8 per cent yesterday. The shares are still cheap, however, argue watchers at Panmure Gordon, saying that "the forward price-earnings ratio is 10.6 times falling to 9 times, while the dividend yield is 3.2 per cent. The free cash flow yield is a reasonable 6.2 per cent". Hardly demanding in what is a defensive sector. Buy.

Hilton Food Group

Our view: Buy

Share price: 163p (+8.5p)

Food, glorious food, at least for investors anyway. If there is one group of companies that is performing well in the midst of the economic malaise, it is those connected with food, be it the big retailers, producers or in the case of Hilton Food, those that packaging it.

The company published its full-year results yesterday, saying that pre-tax profits, revenues and the dividend were all on the up. The stock jumped by an impressive 5.5 per cent, adding to the 13.6 per cent rise of the last month.

Hilton Food says that it has a unique business model and that it can help its credit-crunched customers to save money. In doing so, it will worry about the operational side of the business, rather than the share price, says the chief executive, Robert Watson. That is easy to say when your shares have performed as Hilton's have recently: existing investors will no doubt laud the strategy.

Experts at Panmure Gordon, who advise clients to fill their boots, say that trading on a p/e ratio of 8.5 times, Hilton shares should reach 220p, which represents a 42 per cent upside to Monday's closing price of 154.5p. Decent returns, no doubt, and the watchers also point out that on an enterprise value to Ebitda rating, Hilton trades at a discount to a number of peers.

When asked about risks for the rest of the year, Mr Watson prefers to talk instead about opportunities. This, of course, is spin and bravado, but it should not disguise the fact that investors buying Hilton Foods will get a solid and growing stock in a safe sector. Buy.

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