Investment Column: Mouchel will shine over the long term

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The Independent Online

Our view: Buy

Share price: 59.75p (-8.75p)

The near 13 per cent decline in Mouchel's share price last night appears to have had its roots in the outlook painted by the engineering consulting and services group in its interim management statement.

The message was stark. "The short-term outlook for the group continues to be very challenging and is heavily influenced by the steps the coalition Government is taking to rapidly bring down the deficit in public spending," the company said.

"Local government, which makes up more than two thirds of our client base, has been particularly hit by the unexpected speed and depth of these cuts."

Alongside the grim outlook, investors also had to digest the news that David Tilston was stepping down from his position as the company's finance chief. In his place, Mouchel appointed Rod Harris as the new finance director.

Dealing first with the latter announcement, Mr Tilston did well in managing the company's refinancing earlier this year. But Mr Harris also brings experience. He was appointed as the group's financial controller by Mr Tilston in the autumn of last year, and before that he was the finance director at Carillion Business Services.

We would rather not have management changes when the trading picture looks clouded but, on balance, we see nothing to worry about here. On the business front, however, there are clearly pressures. But here, too, we are not as worried as the market seemed to be.

The operative part of the outlook for us was "short-term". Mouchel's local government arm, as we have noted before, focuses on the kind of services – cost-reduction and improving skills – that are going be in need as the cuts are pushed through. Over in its highways arm, the company's expertise should also prove handy, as the emphasis shifts from new capital projects to maintaining existing ones.

The ride will no doubt be rocky. But Mouchel appears to have the skills to emerge stronger.

The fact that its shares remain affordable also supports the investment case. Ahead of the sharp decline seen last night, they were trading on multiples of under six times forward earnings. The enterprise multiple is more in line with the sector, but again, the stock could not be characterised as pricey.

Indeed, it appears cheap after the sell off. The market's reaction offers a good opportunity to buy into a company that we expect to regain its composure once the short-term pressures have passed.

Ted Baker

Our view: Hold

Share price: 830p (+16.75p)

Ted Baker, the fashion brand, had a less eventful day yesterday, after the 62p jump in its shares on Tuesday.

This leap followed the group – which has 264 stores and concessions globally – delivering a 15.2 per cent jump in revenues for the 19 weeks to 11 June, boosted by new store openings in Manchester, Paris and Hong Kong.

Further good news came from Ted Baker maintaining its margins at a time when many retailers are discounting heavily to get sales through their tills.

Ted Baker, which also sells own-brand products from aftershave to glasses, described the performance of its UK business as "good", but in the future the group's international business is increasingly likely to be a major driver of its growth.

On this front, Ted Baker's launch in China through a store in Beijing in the second half will be significant. This is not only because the country – where the group initially plans to open about half a dozen shops over the coming years – promises huge sales in highly populous cities such as Beijing and Shanghai, but also because Ted Baker will be operating its own stores, as opposed to using franchise partners.

That said, our concern with Ted Baker is that its shares now trade on a forward earnings multiple of 18.1, which makes us cautious for now, though we would buy if they cool down.

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