Investment Column: Premier Farnell making all the right moves

Kalahari; Mulberry


Our view: Hold

Share price: 132.75p (-3p)

Leeds-based Premier Farnell makes its money by shipping parts to businesses around the world at short notice. These range from electronic components sent to PC support dep-artments to industrial parts for engineers. As business growth falls globally in the economic recession, logic goes, then so does Premier Farnell's natural market.

The company said yesterday that its revenue rose 2 per cent in the three months to 2 November. Doubtless, next year will be more challenging, and the company gave a very cautious outlook for trading conditions, leading to a 2.2 per cent fall in its share price. But as its shares have already fallen by more than a third since September, we think they already reflect the bleak economic outlook.

And considering the difficult markets, Premier Farnell is making all the right moves. It is cutting costs and moving more and more business on to the internet, allowing it to boost its margins in the quarter. The company has few peers, and the support services index it belongs to is too broad to provide a relevant price or share performance comparison. But with a p/e ratio of 9.1, it is cheaper than its chief rival Electrocomponents, which trades at about 9.8 times earnings. Its shares are likely to outperform its rival. In the long term for those with 18 or so months' patience, it will be a buy. But for the next few months, we rate it a hold.

Kalahari

Our view: Tentative buy

Share price: 36.25p (+3p)

It has been a busy few weeks for Kalahari. In November, the planned merger with Extract Resources, in which Kalahari is already the biggest shareholder, was pulled over concerns that Rio Tinto - already stake-building in both Extract and Kalahari – could gain control of Extract's Rossing South uranium project in Namibia without paying a premium.

This week, Kalahari moved to get rid of Bob Buchan, the Extract chairman, citing the lack of success of his strategy to list Extract on the Toronto Stock Exchange. Extract needs to concentrate on Rossing South, which is just 5km from Rio Tinto's major Rossing mine, and to focus on lean and efficient operations, according to the disgruntled shareholder.

Kalahari followed up by issuing a chunk of new shares, raising nearly £4m to be used to maintain its 39 per cent Extract stake, dilute Rio Tinto's holdings and generate general working capital.

Strong demand for the new shares illustrates investors' faith in Kalahari's prospects – a faith borne out by yesterday's drilling results from Rossing South, showing outstanding results in terms of both quantity and quality of uranium deposits. "Rossing South is definitely the leading pre-production uranium asset in Namibia," analysts at Ambian said.

Taken together, Kalahari's management has a strong strategy and the prospects, even in a difficult market, remain promising. After yesterday's good news, the shares were already on the up. Mining stocks are taking a hammering across the board, particularly the minnows. But Kalahari is a tentative buy.

Mulberry

Our view: Reduce

Share price: 68p (-4p)

In a climate where everyone seems to be trading down, luxury leather goods is not a place for the faint-hearted investor. Budget chains Aldi and Primark are going great guns. Mulberry, on the other hand, has admitted it will suffer. The UK group, famous for its chi-chi bags, is finding the onset of the credit crunch tough as old boots. It reported a disappointing set of first-half results as it warned on full-year profits. It said the full year "is expected to fall short of that achieved last year and below current market expectations". Shares in the group fell more than 7 per cent on the news.

The actual sales figures weren't bad, with a 6 per cent rise in pre-tax profits to £1.3m against the first half of last year. Revenues jumped an impressive 29 per cent to £27.8m.

The problem lies with its financial second half, as the company said predicted trading over Christmas and January would be hit. Consumers are expected to keep their hands in their pockets when it comes to luxury items and in the 10 weeks to last Saturday, the group revealed that sales had fallen 12 per cent over the previous year.

The company's balance sheet is in better shape than some of its peers. It is also expanding abroad. But sales and the share price will come under more pressure as the downturn bites. Sell.

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