Investment Column: Southern Cross's recovery is far too slow
Tuesday 11 August 2009
Our view: Avoid
Share price: 140.25p (-9.5p)
Southern Cross Healthcare is now a better company than the basket case it became last year, when the management team left after a calamitous decision to issue a profits warning just weeks after telling the market that all was well. That was June last year, and the shares slumped to 130p. Eagle-eyed investors will have already realised that the care home group's share price has not recovered much since then. Yesterday's numbers for the 14 weeks to 5 July hardly helped, with Ebtida down £2m to £22.4m. The shares fell accordingly, by 6.3 per cent.
One of the problems facing Southern Cross, and indeed other care home operators, is that occupancy rates are falling. Sadly for Southern Cross, it is falling faster at the company's homes than elsewhere, while the finance director Richard Midmer concedes that the group is also behind the rest of the market in terms of quality.
Analysts at Investec say that falling occupancy is structural, and that it will not return to historic levels. With Southern Cross already behind, we would look at alternative names in the sector and, even though the group has reduced its debts and made other improvements, we would not splash out on the shares. Avoid.
Our view: Buy
Share price: 17.5p (+0.5p)
Forbidden Technologies sounds like the sort of company that allows people to try out their favourite peccadilloes, especially when you hear that the group claims its products help those publishing on the internet to produce "professional quality" video.
In truth, the AlM-listed company has two divisions: television editing and internet publishing, with clients including the BBC and ITV in Britain and other big broadcasters overseas.
Its chief executive Stephen Streater says he is "quite pleased" with the group's interim results, which were published yesterday and showed a 344 per cent increase in turnover and a narrower losses. He argues that Forbidden Technologies is the only group operating it what is likely to become a multibillion-pound industry. Mr Streater is free and easy with references to Google when arguing about his company's potential.
Given that Forbidden Technologies is not yet profitable, we would guard against getting too excited. However, savvy investors will already have worked out that there would probably be a takeover premium for a group such as Forbidden. If the company really is the only one doing what it claims to be doing, it will attract suitors before too long. For the time being, Mr Streater is coy about agreeing with a prediction by PSQ Analytics that his company will be profitable by the end of the financial year. He is right to argue that now is the time to invest, rather than worry about profitability. As such, investors can assume there is little chance of a dividend, but should nonetheless be encouraged by the 134 per cent increase in the stock price over the past three months.
We reckon that, trading at the present level, Forbidden Technologies' stock is something of a one-way bet. The company is performing well and the revenues are on a charge, which should lead to further share price rises. Moreover, buyers would not want to miss any takeover speculation. Buy.
Our view: Avoid
Share price: 61.5p (unchanged)
"For the super-rich, the novelty of the recession has worn off," says Giles Hutchinson Smith, the chief executive of Mallett. And what good news that is for the company which sells super-expensive art, furniture and and other such trinkets to those who have money to burn. Mr Hutchinson Smith concedes that things were tough at the start of the year, and that the "global economic recession" (we wonder if Gordon Brown shops at Mallett) was behind the group saying yesterday that it had slipped to a loss of £800,000, from a deficit of £300,000 at the same point last year. The bad news for investors was the scrapping of the company's dividend.
Nonetheless, Mr Hutchinson Smith is in bullish mood. While the company's margins have come under pressure, cash has been managed well, he says, and if the mega-rich are bored with the recession and want to start spending again, that can only be good news for Mallett. The fact that a number of its competitors have gone to the wall is no bad thing either, he argues.
We concur, but still would not buy the shares. The investment case for Mallett, based in London and New York is the long-term track record of its impressive yields, Mr Hutchinson Smith argues. The dividend being cut does not help and we would not buy the shares until it is reinstated. Avoid.
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