Investment Column: Outlook is hazy for ash-covered Wh Smith

Renold; Ten Alps
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The Independent Online

Our view: Hold

Share price: 435p (-19p)

WH Smith looked like a good bet when we bought at 517.5p in October. Delivering improving profits, even if sales were flat, we felt that economic recovery and a corresponding pick-up in travel would give a timely boost to the operation's travel business. With the chief executive, Kate Swann, continuing to work her magic, all looked good.

Events, dear boy, events – so Macmillan's saying goes. Events have not been kind to this retailer and the shares have hit the skids, now sitting well below where they were when we bought in. The expected pick-up in the travel business has not materialised thanks to a certain inconvenient volcanic eruption. That was responsible for a 4 per cent fall in same-store sales at WH Smith Travel.

More worrying was that sales would have been down 2 per cent without the eruption. Air travel remains soft, and while WH Smith says it's outperforming, the backdrop doesn't look attractive. Total group sales in the first 14 weeks of the second half of the financial year were also down on a same-store basis – by some 4 per cent – compared to the same period last year. The high street has not picked up the slack, and with the forthcoming austerity drive likely to constrain Britons' confidence and spending power – particularly in the case of public-sector workers – we are not optimistic.

The news isn't all bad. The company appears confident of hitting full-year numbers, and analysts were hardly rushing to make downgrades yesterday. Smith's has some resilient characteristics, and at about 10 times full-year earnings is not overpriced – it sits at a modest discount to the retail sector and offers a healthy prospective yield of 4.7 per cent. However, given the uncertain outlook and the ongoing possibility that Ms Swann could jump when the right offer comes along, we wouldn't be buying at the current price. It's not time to head for the exit yet but we're downgrading to "hold".


Our view: Buy

Share price: 25.75p (-2p)

Renold is not a sexy business. And at first glance the international industrial chain and torque transmission products group's annual results, published yesterday, were equally unappealing. Revenues came down by nearly 20 per cent to £156m over the 12 months to the end of the March, dragging the group to a full-year operating loss of £4.8m, compared with last year's £7.6m profits.

But behind the headline numbers Renold's stock looks increasingly attractive, and yesterday's results mark the conclusion of a pivotal year.

After sharp destocking by customers rocked by the economic crisis, market conditions are now improving. Sales and orders increased markedly from the second to the fourth quarters, pushing the company to an operating profit in the second half. And facilities in China and India leave Renold well-positioned to make the most of strong economic growth.

The group has also got its own house in order, bringing net debt down by £91.3m to £17.9m with a £26.9m share placing in December, and meeting its target to cut costs by £13m.

Matthew Peacock, chairman, noted that with a significantly lower cost base and a stronger balance sheet, the company is now looking forward to delivering improved results as the economic climate recovers. Yesterday's 7 per cent drop in the share price only makes the case stronger. Buy.

Ten Alps

Our view: Sell

Share price: 17.5p (-4p)

The multimedia group Ten Alps has endured a tough year but has launched a three-year development plan for growth that banks heavily on Asia to turn its revenue declines around. The company, backed by Bob Geldof, has concentrated on business-to-business broadcasting over the past few years, targeting defensive sectors including Teachers TV. Yet, the AIM-listed business put out fairly anaemic sales figures in its full-year results: revenues dropped 17.6 per cent. It said the numbers were hit by a fall in advertising sales, admittedly during a recession that has proved pretty hard for many in the sector.

So to get things going, the content division hopes in the next three years to "achieve recognition of the inherent value" by splitting out its online and broadcast TV operations. At the same time, the communications division, including trade publishing and media sales, is to slash costs and invest in business development. That said, pre-tax profits for the full year retreated from £3.3m a year earlier to £3.2m, and the group is not expecting growth in this financial year. Ten Alps has left a few TV production industry experts scratching their heads about where it goes from here, and until we see signs of growth, follow the herd and sell.