Investment Column: Solid Connaught is a safe buy for punters

Gaming VC Holdings; Kewill
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The Independent Online

Our view: Buy

Share price: 342.5p (+2.5p)

Not that we like to blow our own trumpet too often, but we have said for some time that the outsourcing and business support industry is one of the better markets to park your cash in during the recession. The sector has generally done well as clients, including local and central government, have looked at ways to cut costs and inefficiencies during the downturn.

Connaught yesterday announced its interim results, and is certainly one of those groups to have benefited. The company, which maintains social housing and ensures that workplaces are compliant with national and European health and safety rules, said first-half pre-tax profits were up 33 per cent. More importantly, perhaps, the outlook is rosy, the group says, adding that its order book for next year is already 92 per cent full.

The alarm bells may have already starting ringing for investors who rightly point out that government spending is likely to come under pressure in the coming months as Alistair Darling looks to perform some kind of alchemy on the public finances.

Fair point, says chief executive Mark Davies, who instead argues that his company's work, both on the public and private side, is almost completely non-discretionary.

This is probably a valid assessment, and, given the fragile state of the economy, we would continue to put our faith, and more importantly our cash, into safer stocks such as Connaught.

Investors could opt for other outsourcing companies, of course, but they will be encouraged to learn that the stock is one of the cheapest in the sector, despite a solid performance in the last 12 months. Watchers at Numis argue: "The December 2009 price-earnings ratio of 13.6 times is undemanding for the growth-rates visibility and exposure to the stronger end of public sector spend and regulatory drivers." We largely agree. Buy.

Gaming VC Holdings

Our view: Tentative buy

Share price: 187.5p (-20p)

It may be counter-intuitive, but the recession in Europe has had little effect on people's gambling habits, if the Alternative Investment Market-listed Gaming VC's numbers are anything to go by. The group, whose primary offering is an online casino in Germany, reported a modest increase in full-year pre-tax profits yesterday, with net gaming revenue up 17.5 per cent.

Not bad, you might conclude, and possibly the company has offered sufficient proof that it is coping well with the downturn. The chief executive, Kenneth Alexander, says so, but he would also argue that real growth will come from what are expected to be imminent acquisitions in South America, the continued diversification away from Germany, where the group potentially faces regulatory difficulties, and the establishment of operational hubs in Israel and Malta.

It is a little worrying that the stock was down 9.6 per cent yesterday, but investors have had a good run, with the stock up nearly 50 per cent in the last three months. The group pays a dividend, and with its undemanding rating of less than 3 times enterprise value to Ebitda, punters might decide the fall offers a decent buying opportunity.

We still think there are recessionary concerns about the online gaming industry, and, if it gets a lot worse, Mr Alexander concedes that the group will be troubled. While it is moving into markets other than Germany as quickly as possible, the company admits that it does rely on a small number of big clients in that country.

Gaming VC's performance, however, is creditable at worst, despite the recession. The shares are cheap, and there is plenty of growth potential, so we would be buyers, despite what we think is a risky sector. Tentative buy.

Kewill

Our view: Buy

Share price: 54p (+7.5p)

It was an excellent day for shareholders in the logistics software group Kewill yesterday as the stock jumped 16.1 per cent on news that its full-year numbers will hit expectations.

Perhaps it is a sign of the times that such a share price jump occurs when a company simply says it will do what was expected of it. Chief executive Paul Nichols reckons, however, that it is more as a result of relief that the group will hit its targets, after a year or so when the share price has dropped by more than 50 per cent.

The group is concentrating on transforming itself into a software-as-a-service company, which generates more recurring revenues than simply selling licences. The analysts agree that this is a wise move and insulates the company from falling sales and subsequently the worst of the downturn.

The experts agree that the stock is undervalued. Those at KBC Peel Hunt are the most pessimistic, arguing that on current levels there is a 30 per cent potential upside in the share price. Buy.

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