Investment Column: Now is not the time for a punt on Mears

Rok; Essenden

Our view: Avoid

Share price: 265p (-6p)

A bet on the social housing maintenance group Mears is in effect a punt on which way you think the equity markets are going.

After the company issued its first-half numbers yesterday, showing a rise in profits, revenues and the dividend, it is easy to see why buying Mears' shares is as safe as, well, houses. The group exists outside the part of the economy that has been savaged by the recession, and we expect it will carry on producing good results regardless of whatever nasties might come along in the coming months.

However, for those who think the worst is over (and there is a growing number of green shoot-merchants about), it might be a bit pointless investing in Mears, and because equities have rallied strongly in the past few months Mears' stock has been left behind. It has actually fallen over the past six months as investors have switched out of defensive companies and into more cyclical shares.

Ordinarily, we would be all over Mears and would be persuaded to buy the shares. The numbers are good, the outlook is strong and, according to the watchers at Panmure Gordon, the stock is undervalued. The broker said in a note yesterday: "The group continues to demonstrate healthy growth in revenues, earnings and dividends. The 2009 price-earnings ratio is 12.3 times, falling to 11.2 times, which remains at a discount to its nearest competitor. The cashflow yield is a solid 6.5 per cent average over the next three years."

The experts say buy, but put their target price at 260p, below its current level. With momentum strongly behind the equity markets as confidence slowly returns, we probably think it is the wrong time to buy Mears. If the economy takes a turn for the worst, fill your boots, but if the steady stream of more encouraging news continues, it is probably worth putting your money into something a little racier. Avoid.


Our view: Hold for now

Share price: 48.5p (-9.5p)

The worst of the downturn is over, says Garvis Snook, chief executive of the building maintenance group Rok.

While the recovery may take some time and, although we will not return to the heady days of a few years ago, he says we can expect the company to improve as it concentrates on higher margin business.

Mr Snook's confidence was not entirely shared by his investors: the stock fell 16.9 per cent yesterday after the group, which describes itself as the "nation's local builder", said first-half pre-tax profits were down 47 per cent and revenues had dropped 33 per cent.

Mr Snook says Rok has worked to protect its margins rather than revenues, and conditions have improved in the past few weeks.

That is great, but it is the share price going north that investors want to see. Mr Snook says he cannot control the level, while the shares have enjoyed a good run in recent months.

We would be cautious about the size of yesterday's drop in the share price, and although Mr Snook is probably right when he says conditions are improving, we would want to see more tangible evidence in the numbers.

Rok will no doubt benefit when the recession finally ends, but investors should wait until the group can confirm an improvement through its results. Keep an eye on Rok, but do not buy it just yet. Hold for now.


Our view: Tentative buy

Share price: 34.37p (+0.87)

The nice thing about the Alternative Investment Market is the range of potential investments available to punters. Of course, the range of basket-case biotechnology and mining groups is ever present, but ten-pin bowling might not be so obvious.

Essenden, which operates 38 ten-pin bowling centres across the country, issued its interim results yesterday, saying its sales and revenues had fallen in the first six months of the year.

Nevertheless, the investment case is pretty strong. The six-month numbers are unimpressive, but July's like-for-like sales were up, indicating that there is some justification for Nick Oppenheim, the departing chief executive, to assert that the worst is over.

We are not so sure about his claim that the only risk to the company is another banking crisis similar to the one we saw last year, but we do take heart from the stock's strong showing over the past few months.

Like any penny stock such as Essenden – the market capitalisation is just a nudge over £7m – there is plenty of risk.

Investors will have to rely on strong share price growth for any return, but we like Essenden and would take a chance. Tentative buy.

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