Investment Column: Pennon investors get best of both worlds
Laura Ashley Holdings; Penna Consulting
Wednesday 03 June 2009
Our view: Buy
Share price: 481.25p (+0.25p)
There are two good reasons for buying Pennon shares. Firstly, we have argued for some time that the water utility groups are a safe bet during a recession. Yes, there is some risk to investing in the industry since all are waiting for the water regulator, Ofwat, to approve their business plans for the five years between next year and 2015, but for investors the water groups have generally been a safe haven during the recession.
Of all the water companies, we like Pennon's South West Water (SWW) best. The group operates away from major manufacturing centres and has been hit less by the newly unemployed defaulting on their bills. SWW's bad debts were only £1.8m in 2008, according to yesterday's preliminary results.
And secondly, for punters that reckon we should all be backing something a bit racier, Pennon is not just a water company. Viridor, the group's waste management arm, which recycles rubbish and generates energy that is then sold to the grid, is flying. The division's profits were up 12.7 per cent last year, with the company expected to benefit from increased energy output.
The analysts at Evolution reckon that the shares are cheap, but we would not necessarily agree and actually see the stock, which trades at 13.5 times 2009 earnings, as more expensive than several of the other water companies, such as United Utilities and Severn Trent.
We would still be buyers. Yes, the other water companies have broadly the same defensive characteristics as SWW, but we are firm backers on the growth prospects of Viridor, which we only see as benefiting from extra government spending on waste management and from additional energy production projects.
Pennon's shares have touched the dizzy heights of 658p in the last 12 months. We would expect to see them in similar territory before too long. Buy.
Laura Ashley Holdings
Our view: Hold for now
Share price: 17p (+1.5p)
Laura Ashley went some way to proving yesterday that not all retailers are struggling to keep their heads above water. The clothing and soft furnishings outfit said that sales in the first 17 weeks of the year increased by 8.4 per cent, despite the tales of acute woe from most others in the sector.
It was not just a fluke, said the group, which argues that the impressive numbers are the result of extra advertising spending and greater floor space allocated to sales. "Despite the challenging economic environment, the board remains cautiously optimistic for the current year," the company said yesterday.
The analysts at its house broker, Numis, raised their January 2010 pre-tax profit estimates on the strength of yesterday's results, and said that they viewed the projection as conservative "and... that earnings risk remains firmly to the upside".
We would still be very cautious about most retailers, however, and would certainly need more than 17 weeks worth of data before buying.
Hats off to Laura Ashley for its performance, but we reckon investors should give it until at least the year end before buying, especially with the unemployment rate not expected to slow for some time. The stock was up 9.7 per cent as the market responded well to yesterday's good news, putting the share price beyond Numis' price target of 16p. Hold for now.
Our view: Hold for now
Share price: 187.5p (+20p)
Never let it be said that a recession is wholly bad for business. Penna Consulting, a human resources company, posted impressive full-year results yesterday, with profits up a striking 176 per cent. All-importantly, the total dividend will rise 6p, up from 2p last year.
How so? Its chief executive, Gary Browning, says that the creeping unemployment rate has helped as client companies have asked Penna to advise on strategy with fewer people, while the group has also helped customers to move to less costly locations.
For investors, the dividend hike alone will attract some. Buyers should be aware, however, that until yesterday's 11.9 per cent jump in the share price, the market's appreciation of the group had cooled after the shares spiked in February when Penna said that its annual numbers would beat expectations.
We would worry that the stock will slide after the hullabaloo of yesterday's numbers dies down. We do agree with the house broker, Collins Stewart, when they say that trading on a 2009 price-earnings ratio of 8.6 times is hardly demanding, but we are not sure the shares will garner enough support to reach the watchers' target of 280p.
Generally speaking, investors should back winning stocks, but we would be tempted to wait to see if the shares fall back after yesterday's gains before buying.
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