Investment Column: Ted Baker not tailored for punters in 2009

Melrose Resources; HR Owen


Our view: Sell

Share price: 340p (+15.5p)

We are not keen on the UK high street, regardless of whichever high street it happens to be. The posh clothing group Ted Baker tends to pick the classier thoroughfares for its upmarket apparel, but that did not stop its 2008 preliminary results, announced yesterday, showing a disappointing 11.4 per cent drop in profits, coupled with a warning that the numbers this time next year will be worse.

The group's chief executive, Ray Kelvin, is pleased with the results, given the economic situation. He lauds Ted Baker's passionate team and commitment to quality, and says the share price fall over the past year does not reflect the company's true trading record. Indeed, the 21 per cent fall in the shares genuinely is a decent performance. However, investors should worry instead whether the 11.4 per cent drop in profits, constitutes a good performance.

Mr Kelvin does say Ted Baker is a good medium- to long-term punt. We would not disagree, but we would not be inclined to buy the shares now, in the midst of recession. The experts at Singer say that if management can convince the market of its "ability to trade the business more effectively... and reduce costs then the current valuation [of 10.5 times the price-earnings ratio] is appealing".

Mr Kelvin says he will not cut costs, preferring instead to worry about the quality of Ted Baker's clothes, even though yesterday's statement mentions controlling costs. The group later confirmed that it would not be cutting further costs after all, as that might damage the brand.

We like Ted Baker, but think that this year could be tough for a group that is a good bull-market punt. Sell.

Melrose Resources

Our view: Buy

Share price: 209.5p (+26.5p)

Anyone offering a risk-free investment should always be treated with a dose of scepticism by investors. In fairness to David Thomas, the chief executive of the oil and gas group Melrose Resources, who yesterday said he could not think of any risks to his company in the next year, Melrose has had a stellar 12 months.

The company's shares rose by 14.5 per cent yesterday after it announced forecast-busting results, turning a profit after losses in 2007. Although investors will note the good numbers come partly from the record oil prices last year, Mr Thomas says that with 60 per cent of its Egyptian gas sold at fixed prices, easily adjustable capex and $510m (£349m) of debt facilities committed until 2014, the group is a solid investment choice.

We would be inclined to agree. The group will cut capex by 20 per cent in 2009, which will protect margins from sickly end-markets, and with less being spent on exploration this year, and more on developing projects such as a gas storage facility in Bulgaria, Melrose appears to be doing the right things.

Those worried about missing the boat will be heartened by analysts at Charles Stanley, who said yesterday: "Based on our current macroeconomic assumptions, we estimate a central net asset value for Melrose of 371p a share, which is more than double [yesterday's opening] share price... the shares valuation multiples are among the lowest in the peer group. Prospective earnings multiples are of the order of five times for 2010."

Melrose's shares have had a torrid time in the year, trading down nearly 50 per cent before yesterday's results. We would expect that the group has now turned a corner. While the year will not, in fact, be risk-free, we would expect the share price to have a good 2009. Buy.

HR Owen

Our view: Sell

Share price: 49.5p (-4p)

When the economy is booming, selling luxury cars to nouveau riche City workers in London is as easy as selling a dodgy mortgage-backed security.

Sadly for HR Owen, the luxury car retailer, things have changed, and while the company said in yesterday's annual results announcement that the first half of 2008 carried on as before, the second six months of last year were bad on an unprecedented level, according to the group's chief executive Nick Lancaster.

But it is not that Mr Lancaster is downbeat. He reckons his company's decision several years ago to move to the upper echelons of the luxury car market was prudent and that by increasing the group's after-sales offering, 2009 will be a profitable year. The growth in the number of Asian and Middle Eastern buyers in London is helping, as is the lowly rate of sterling.

Investors may not share Mr Lancaster's optimism. Yesterday's numbers showed that profits were down to £1.4m, from £3m last year and the shares were down 7.6 per cent, adding to the 62 per cent fall in the last year.

HR Owen will need the economy to improve before it gets back to being on investors' wish lists. Sell.

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