Investment Column: Tate could yet prove to be a real sweetie

Paragon; Sports Media Group
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The Independent Online

Our view: Tate & Lyle

Share price: 388.7p (-18.4p)

Sweetener prices were very much in focus when Tate & Lyle issued an update yesterday. The market has been looking for clarity on the 2010 pricing round and concerns about falling prices have been weighing on Tate's share price since the start of the month.

As it turned out, the news was not as bad as analysts had predicted. Tate said sweetener prices in the Americas would be below last year's and margins would be squeezed, but there was some relief from lower input costs.

RBS analysts reckon the full-year impact on profits could be about £15m, which, while not great news, could have been worse. This is important, we think, for while trading and outlook are uninspiring, the market is already discounting the downside and may be missing sight of the upside. This view is supported by the valuation with the stock, which yields upwards of 5.6 per cent and trades on a undemanding multiple of 11.2 times RBS's forecasts for the full year. Investors should note that, besides the concerns mentioned above, the price has been hit by rumours that the US hedge fund group Harbinger may offload its holding in Tate & Lyle. Even if it does sell we believe that, given the valuation, the impact will fade relatively swiftly. It is also useful to recall that trading has been tough, not just for Tate but for almost every other company in the world. Conditions should improve as the recovery takes root – something the valuation seems to be overlooking.

The market also appears to be ignoring Tate's finances. Its net debt slid by £123m during the quarter to stand at £864m at the end of December. Investors' interest should also tick up as the new chief executive, Javed Ahmed, outlines his plans for the business in the months ahead. So the shares could actually prove sweet for investors. Buy.

Paragon

Our view: Avoid

Share price: 138.5p (+3.4p)

A chart of Paragon's share price over the past three years makes ugly reading. The financial crisis pushed it off a cliff and, in a very real sense, it is an achievement that the specialist lender is still here.

That was then, though. Now, the company actually offers a rather compelling investment case. Noble, the broker, points out that Paragon used to trade at one-and-a-half to two times net assets. Today the shares sit at a discount of about 40 per cent. Yesterday's trading statement said Paragon had made profits of just over £13m in the fourth quarter, redemptions were low and customer repayments were ahead of industry data (although the exact figures were not given, so we'll take that with a pinch of salt).

The company is back in the market, funding its operations through securitisation (the markets for which are mending) and, in its "specialist" niche, it benefits because much of the competition has vanished. All of which makes investing in Paragon look compelling.

We are inclined to remain cautious, however. Paragon does make a good case and may well prove to be a recovery play. In steering clear we could well be missing a trick. However, it has not proved to be a brilliant judge of risk in the past. Lenders' arrears are relatively low (and falling) because interest rates are low, but that might not last as long as some people think.

Paragon is cheap, there is no doubt about that. But we would prefer to sit back and see how it trades over the next few quarters before taking the plunge, even if that means missing out on some gains. There is potential for the adventurous but for now we say avoid.

Sports Media Group

Our view: Sell

Share price: 5p (-0.88p)

Sex sells, or so the old adage would have us believe. Were that always true, the Daily Sport and its Sunday sister would have a higher circulation than The Financial Times and be raking in money. Sadly for its parent company Sports Media Group, neither is true.

SMG endured a torrid start to 2009 after it breached a banking covenant and its former owner David Sullivan was forced to step in and bail it out in April. The previous month, circulation had slumped to its nadir. The situation has improved recently, with the daily paper selling 85,000 by August.

Yesterday, SMG's management issued an update saying that the five months to the end of last year had been "encouraging". It traded profitably during that time and remained above budget, with the board confident that its profits would recover further.

The appointment of William Martin as chairman-elect has also eased uncertainties. However, the paper's circulation has begun to slide again and, while there are mobile and online operations, they operate in a crowded field. With the outlook uncertain for the media in general, SMG is always going to prove a risky play. Given its headwinds, it is too risky for us. Sell.

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