Investment Column: St Modwen now worthy of a second look

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The Independent Online

St Modwen

Our view: buy

Share price: 168p (-1.2p)

At the start of July we said the property company St Modwen was one to avoid, even though with its shares at 178p they were sitting at a 25 per cent discount to their net asset value, made up of its property, landbank and other assets. That they have fallen since then, tells you all you need to know. Sometimes shares that look cheap on a particular valuation metric are down in the dumps for good reason. Is it now time to re-assess St Modwen though?

Well, here are the good bits. St Modwen specialises in regeneration of brownfield sites – one of its more notable projects is the old Rover site at Longbridge. It also has a deal with homebuilder Persimmon. The company yesterday returned to profit and, crucially, started paying a dividend again. Its net asset value per share increased by 9 per cent to 218p. In other words, the shares which were cheap when we last looked at them are still cheap today – candidates for an investment equivalent of Poundland.

But some investors, at least, are beginning to take notice. The stock has basically flatlined for several months, but has been attracting some interest in recent weeks. Now that its finances are increasingly stable, St Modwen has opportunities. Its balance sheet means it is able to buy secondary property at rather attractive income yields.

The company still has to carry a health warning that reads: public-sector cuts, economy that still looks very shaky, double dip a real possibility. But it is hardly alone in that. And given that net asset value is forecast to be up to 234.5p by next year, the shares are beginning to suggest a re-valuation may be in order if it can keep things looking healthy in what the company admits are "challenging markets".

The prospective yield, at 1.6 per cent, is nothing to write home about but we think it might be worth taking a chance on the shares. Buy.

Ocado

Our view: Sell

Share price: 251p (+1p)

It has been a rollercoaster ride for investors in Ocado since the online grocer floated at 180p in July. Shares crashed to a low of 123.5p in October, which left critics feeling smug over a company which has never made an annual profit. Since the autumn, however, the company's share price has more than doubled and yesterday hit an all-time high of 251p.

So what has changed? In reality, not a lot. Sure, the fast-growing online grocer was bullish last week after it unveiled its first pre-tax profit – albeit a modest one of £300,000 for the fourth quarter. But as Numis Securities said, Ocado's story is "almost identical to the day of the IPO". What has happened is that Ocado has been the beneficiary of highly speculative bid talk – which we find slightly baffling given its lofty market capitalisation of £1.4bn – and a squeeze from short-sellers exiting their positions, perhaps combined with those sensing its shares had fallen too far.

While we note that Ocado will probably make its maiden annual profit this year, the stratospheric forward multiple its shares trade on – 168 times forecast earnings – and their volatility since the float make us nervous. Therefore, while we think there will be plenty of growth for all the big players, notably Tesco, Sainsbury's and Asda, in online grocery for several years to come, we advise avoiding Ocado until sanity is restored to its valuation.



Kofax

Our view: Buy

Share price: 440p (+77.5p)

Kofax says it is the "leading provider of document driven business process automation solutions". But behind the appalling word salad lies a company that has impressed the market with solid growth, and we think that there could be more to come in 2011.

What Kofax actually does (in English) is offer companies software and services to manage data capture. It takes documents in any format and downloads them into a single system.

The company released a strong set of first-half results yesterday, as revenues were up one-fifth to $121.7m (£75m) and earnings before interest, taxation and amortisation up almost 200 per cent to $23.5m. The operation has sold its struggling hardware business, slashed costs and concentrated on higher-margin direct sales. As Panmure Gordon pointed out, the services business is leading the charge, but software was also up 15 per cent.

The business appears to be moving in the right direction, and Altium Securities analysts said it trades on an estimated value of eight times full-year earnings before interest, taxation, depreciation and amortisation, a 20 per cent discount to the UK software sector. We now agree that this seems unwarranted. Buy.

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