Investment Column: Sports Direct is better, but not yet a buy

Holidaybreak; Melorio

Our view: Hold

Share price: 58.5p (-0.25p)

This column has rarely been kind to retailers in the past year, and rightly so, judging by the rate at which former high-street stalwarts are struggling.

We last looked at Mike Ashley’s Sports Direct International in September and said that punters should sell at 76p, which turned out to be sage advice given today’s share price.

However, there are signs of improvement at Sports Direct, which yesterday issued a trading statement saying sales in the three months to |17 February were up 12 per cent, including new space the company has taken on. Gross profits were up slightly at £143m.

Rather frustratingly, the group does not publish like-for-like sales figures but, nonetheless, the numbers are good, especially given the general horror being seen by many retailers.

So is it a buy? Those at Seymour Pierce say it is already too late: “We are downgrading our recommendation from ‘buy’ to ‘hold’ after the strong performance, [up] 62 per cent in absolute terms, since our upgrade on 17 December … the stock is now rated at 8.1 times 2008/9 earnings, increasing to 9.2 times 2009/10 earnings, which in view of the comments on the dollar are likely to be vulnerable to further revision. The company also has significant net debt of £478m at the interim stage.” While others are more bullish, we are not yet inclined to be buyers and would wait a little longer to see if the group really is bucking the high-street trend. Hold.

Holidaybreak

Our view: Cautious hold

Share price: 197.5p (+7.25p)

“Flat is the new up,” says Holidaybreak’s chief executive, Carl Michel, partly in jest, after yesterday’s interim management statement, which said that the group expects its full-year trading to be on a par with last year. The stock was up 3.8 per cent as a result. Investors are unlikely to appreciate the joke, however, especially after seeing the stock fall by nearly 70 per cent in the past year.

In truth, Holidaybreak, the UK holiday company, is doing better than the share price suggests. Circumstantial evidence points to the fact that the UK-based group will benefit from British holiday makers choosing to save money by staying in this country, and Europeans crossing the Channel to take advantage of the low sterling rate.

Mr Michel blames the illiquid shares, and the fact that small-caps have taken something of a mauling in the markets, for the poor stock price. That may be fair, but it is not a very persuasive argument for punters, especially when the interim dividend was also halved, albeit to 16p.

However, because the shares have fallen so much, the yield remains attractive. The other nice thing for investors is that the shares are “bloody cheap,” says Mr Michel.

Experts at Teathers agree: “The shares trade on a 2009 price-earnings ratio and enterprise value to Ebitda of 4 times and 4.2 times respectively, with an expected free cashflow yield of 17.8 per cent. [It is] arguably the lowest-rated stock in leisure.”

This is all well and good, but with the recession getting worse and the market already showing that it is not too keen on the shares, we would advise caution. Cautious hold.

Melorio

Our view: Buy

Share price: 74.5p (unchanged)

Talking to Alex Sheffield, finance director of the vocational training group Melorio, you wonder why the shares are undervalued and have lost a third of their value in the past year.

The group receives most of its revenues from the Government, which is keen to get school-leavers out of the job centre and into work. It has invested in recent months in growth industries such as ICT and logistics. Organic growth is solid and the group’s update yesterday, which came with news that Hugh Aldous, the new chairman, bought 98,000 shares, was about as jolly as it could be.

So why are investors not flocking to the stock? In a word, construction. While Melorio is working hard to edge away from an industry which has been about the most toxic in the economy, 40 per cent of its revenues still come from training people how to build things.

The shares should do well in the coming months, however. There are no signs that the Government is going to spend less and the stock is cheap, say watchers at Daniel Stewart: “The shares … look very good value … our target price is 175p – upside of 133 per cent – at which price the shares would be on a March 2010 p/e of 7 times.” While it is something of a speculative punt, we are attracted to Melorio. Buy.