Investment Column: Pace shares will quicken investor returns

Pace

Our view: Buy

Share price: 195p (-3.75p)

Investors that a year ago bought shares in Pace, the set-top box maker, are in clover. The stock has risen by 59 per cent in the last 12 months, and if the finance director, Stuart Hall, is to be believed, it will get even higher. Mr Hall says the shares were trading at a very low level and the increase is no surprise to him – what is more, Pace remains undervalued.

He therefore takes issue with the analysts at WH Ireland who say the group will by trading at a 20 per cent premium to the sector if the stock hits its target price of 235p. Mr Hall reckons the 235p target is too low. WH Ireland uses the wrong comparison group, he says, arguing that it is better to consider those who predict 250p or higher.

We think that investors would undoubtedly benefit from buying Pace stock, but that it is not a giveaway.

The group issued its half-year update yesterday, saying it was trading in line with its expectations. That is rather a bland way of saying they are expecting great things. Sales of high-definition and digital television boxes are expected to grow for the foreseeable future, and we think that this will drive the share price higher.

Ah, but what about the recession? Will people not get rid of their 5,000 channels if they are feeling credit crunched? Maybe, but investors should also consider that in most countries there is no such thing as terrestrial television and that Pace's products, or those of its rivals, are needed to watch anything at all. Mr Hall also points out that only 3 per cent of the world's television watchers do so in high definition, providing plenty of opportunities.

We think Pace will continue to perform well, and that the share price will continue to rise. While we reckon the stock is pricey, we also believe you get what you pay for, and would recommend Pace as a strong buy.

St Modwen Properties

Our view: Hold for now

Share price: 179p (-2.5p)

When we looked at the property developer St Modwen 12 months ago, analysts at its then broker, Landsbanki, said the group's shares would soar from 310p, the level at the time of last year's interim results, to 470p.

Landsbanki, for obvious reasons, are no longer the house broker, and it turns out that the analysts' predictions were woeful. The group's stock has plummeted as property values have collapsed in the last 12 months.

It got no better yesterday when the group issued its most recent set of interim results. Losses slumped to £98.3m, versus £20m in 2008, its net asset value fell by 20.4 per cent and the group has also scrapped the interim dividend. The silver lining for the group was its trading profit for the period, which was in the black at £6.8m.

Its chief executive, Bill Oliver, concedes that the numbers are "terrible," but says the market is reaching its nadir. Yes, there may be a little more pain to come, he says, but the worst is over. If investors accept this, St Modwen could be worth buying. After getting a rights issue away, and refinancing its debt, there are few concerns over whether the group will exist in the future. As such, a buy would be a one-way bet.

We are a little more cautious, and would wait to see if the green shoots survive the winter. Hold for now.



Ashley House

Our view: Tentative buy

Share price: 80p (unchanged)

Ashley House is something of a Jekyll and Hyde company. On the one hand, the group that builds doctors surgeries and the like for the NHS is now doing very well indeed after the hiccup of a profits warning back in December. Yesterday's preliminary results highlighted a 20 per cent jump in revenues, while pre-tax profits were up 9 per cent. Most importantly for investors, and increasingly unusually for an Aim-listed group, the company will pay a dividend of 4p (although this is down on last year). Investors should also take comfort from the £245m of contracts it has with the NHS for the next couple of years.

The problem is that the impressive performance has done nothing for the share price. The stock did not move an inch yesterday, despite the upbeat message and despite the fact that the chief executive, Jonathan Holmes, says the shares are undervalued.

The reason is the group's reliance on the NHS. The two main political parties are engaged in a war of words over which will cut public spending least, but cuts do seem inevitable.

Ashley House says its area of expertise, primary health care, is set to be protected most, and therefore the group is more resilient to public-sector cutbacks.

While we are not sure the market necessarily buys that yet, we do think the shares are lowly enough to warrant a risky punt. Tentative buy.

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