Investment Column: Stick with confident Morgan Crucible

Morgan Crucible

Our view: Hold

Share price: 299p (+22.5p)

Last January, in our most recent look at Morgan Crucible, we detected signs of a little "expectations management" on the part of company bosses. Mark Robertshaw, the chief executive, said prospects were only tentatively rosier after a tough year. We felt he had grounds to be more optimistic.

Yesterday's stellar results prove we were right. The company, which provides carbon technology services for the aerospace and space-exploration industries, raised its final dividend by 11 per cent to 5p, taking its total 2010 payout to 7.7p on the back of underlying pre-tax profits of £75.7m for the year to 2 January, against £47.7m in 2009. That's the past; for the future, the company is being far more bullish about the outlook than it was.

Morgan Crucible aims to double those profits by 2013 through a combination of cutting costs and entering new markets. It may also seek to do deals. And there was nothing tentative about what Mr Robertshaw had to say, either. He said he was confident that the company was "well placed" to improve its performance further in 2011 and beyond. And he added that the momentum in the business should allow the company to meet his ambitious new growth targets.

The trouble is, the shares have woken up to the Morgan Crucible story. When we last said buy, they were down at 169.5p. If they keep rising at their current rate it won't be too long before they double that. Time to take profits? Well, the global economy is picking up even if Britain's isn't, which bodes well for Morgan's products.

There is certainly room for it to expand into new territories (it is not as well-represented in "emerging markets" as some of its peers). And the valuation, at 12.73 times next year's earnings, is not aggressive (the forecast yield is moderate at just under 3 per cent). By all means take profits, but we'd back the company to meet its targets. Hold.

Game Group

Our view: sell

Share price: 70.25p (-1.75p)

Game Group, the computer game retailer, touted its growth potential at a strategy day for analysts yesterday. The centrepiece was delivering a "step change" in online revenues, largely through increasing integration between its stores and website. It also waxed lyrical about increasing footfall conversion rates in stores, "maximising new revenue streams", and providing new payment options.

Game will invest £15m of the cost savings it expects to achieve in 2011-12 into this strategy and Ian Shepherd, its CEO, is "confident" this will boost profits. Furthermore, the retailer has signed a new banking facility for £160m over three years.

However, there was a sting in the tail of Game's update, notably that the shift to online and digital will reduce gross margins by about 100 basis points this financial year. The problem with the internet for Game is not only that it has massively widened the purchase options for consumers, many of whom now shop with Amazon, or Tesco, but that it has given birth to the beast of illegal downloads. Despite Game's tempting dividend yield (8.3 per cent for 2011) and a modest forward earnings multiple of 9.26, we don't see much upside for Game's shares. We fear Game is not truly facing up to how many of its 1,300-plus stores it will have to shed to remain competitive. Sell.

Helical Bar

Our view: Hold

Share price: 272.6p (+2.6p)

The last time we looked at Helical Bar, we opted to back the stock because, despite an unexciting performance and an uncertain economic environment, the historical trading range suggested it was due to rise. This has not happened.

The property group's shares have weakened (though it raised around £29m through a placing in December) and the economic picture remains cloudy (though parts of the property market are showing signs of life). And while yesterday's trading update did show some progress in the form of attractive acquisitions, the company did not pull any rabbits out of the hat.

We think the stock, which trades a small premium to current net asset values against a discount for peers, may continue to struggle to find direction as the market looks for firmer signs of recovery in the broader sector. Long term, Helical is a good, safe bet, not least because, as we noted last time, it has historically traded at a nice premium to NAV. In the short term, we'd advise against buying any more shares. But hold what you have.

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