Investment Column: Strong yield makes Filtrona a certain bet

Harvey Nash; RPC Group

Our view: Buy

Share price: 222.5p (+26.4p)

It was undoubtedly a good day for investors in Filtrona yesterday as the group surprised the City by saying it was doing better than expected.

The cigarette filter maker's shares put on 13.5 per cent after it said that trading in the first half of the year would be materially ahead of previous guidance. The good news from the company comes after a strong performance from each of its three divisions: its protection and finishing products unit, the porous technologies business and the coated products arm.

Yesterday's upbeat market update comes after a similar announcement in April and led to a series of upgrades among the industry analysts.

On the face of it, Filtrona seems to have everything an investor might wish for; a dividend giving a yield of more than 4 per cent, a solid commercial performance and a share price that most of the analysts say is still undervalued by the market.

Trading on a December 2010 price to earnings ratio of 10 times, the stock is "far too low given the quality of businesses in the portfolio," say the experts at RBS.

If we had one concern (and given the yield, it is not strong enough to dissuade us from recommending the stock), it would be that perhaps the share price is approaching fair value, especially after yesterday's hike. The analysts at Altium joined in the cheering of Filtrona yesterday and raised its target price for the group. But the increase was worth just 7p, suggesting that there may not be an awful lot of juice left in the share price for those that don't yet own it.

Nonetheless, we would be backers of the stock. The dividend yield alone justifies a buy recommendation and yesterday's share price jump shows that Filtrona is now on the market's radar.

The case for buying shares in Filtrona is compelling and investors should fill their boots. Buy.

Harvey Nash

Our view: Buy

Share price: 43.24p (+0.24p)

It has been an arduous two years for recruiters but the worst appears to be over.

Harvey Nash, which specialises in IT recruitment, provided further evidence of this yesterday by revealing that its net fees in the first quarter were up 6 per cent on the fourth quarter. This momentum was driven by a 19 per cent uplift for permanent staffing in the UK and Nordic regions, with key sectors being the telecoms, technology and financial industries.

That said, Harvey Nash, which also provides IT sourcing and HR recruitment, is not yet cracking open the champagne and the group's first-quarter revenues and gross profits were 4 per cent and 6 per cent lower, respectively, on the same period last year. The group also noted that the recovery in demand for its services remains uncertain, particularly in the eurozone, as well as citing risks to macroeconomic growth.

However, there is plenty to recommend in Harvey Nash's shares, not least its progressive dividend policy, which in 2009 delivered a 10 per cent increase in the total divi. Furthermore, shares in Harvey Nash, which trade on a 2011 price to earnings ratio of 9.6, now look good value and are at a substantial discount to rivals Michael Page and Hays, according to analysts at Numis. We say buy.

RPC Group

Our view: Buy

Share price: 243p (+2p)

During a scene in The Graduate, Dustin Hoffman is accosted by a fellow guest at a house party. "I've got one word for you," he says. "Just one word: plastics. There's a great future in plastics."

While there might not be the same euphoria around the sector as in late Sixties cinema, one company that specialises in plastics may be worth a look. RPC is Europe's leading supplier of "rigid plastic packaging".

About 59 per cent of its operations involve packaging for foods, from yoghurt pots to ketchup containers. Its Bramlage Kork site processes natural corks for the champagne and sparkling wine industry. It also provides packaging for drugs and cosmetics.

The group released strong full-year numbers yesterday. While sales were down, its cost-cutting drive hit £14m by the end of March, with more expected this year.

While there are question-marks over the volatile polymer price, the recovery in sales in Europe should help to drive volume growth. Analysts expect sales to rise next year. At a price of 9.1 times estimated 2010 earnings and expectations of a 4.4 per cent dividend yield next year, this looks worth a pop. Buy.

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