Investment Column: Telecity can rise above Irish problems

Our View: Hold

Share price: 450.5p (-36.5p)

No company can operate in a vacuum, but Telecity, which operates data centres around Europe, appears better equipped than most to weather the current financial storm.

Barclays Capital put it neatly: during the financial crisis of 2008/2009 the company delivered record growth. And the momentum established then appears to have continued.

Yesterday, the company delivered a 20 per cent rise in revenue to £122.2m which translated into adjusted pre-tax profits of £31m (which excludes currency gains and refinancing costs that depressed last year's headline pre-tax profit), up 44.6 per cent.

At the same time it announced the (widely trailed) acquisition of Dublin-based Data Electronics Group for £87.6m.

That's not at all cheap for a business that delivered a profit of just £2.5m for the 2010 financial year. But it does make Telecity the market leader in Ireland.

Before you ask what the point of that is, given that country's economic malaise, it's worth noting that Ireland's low corporate taxes make it the gateway to Europe for many companies. As such, being the market leader there makes all kinds of sense for high-tech service providers such as Telecity. Indeed, the company – whose business is entirely focused on Europe – has been able to defy the wider economic mess because its product is in such high demand.

Driven by the expansion of the digital economy and its continued evolution, Telecity is bringing more and more capacity on stream to cope. As such, it can continue to grow.

All the same, pricing has proved soft in some of Telecity's markets and even though the shares have fallen sharply recently, they are not cheap on 23 times forecast full-year earnings, which puts them in line with international rivals but on a premium to local peers. So, while the strong prospects argue against a sell view, the valuation weighs against buying.

Chariot Oil & Gas

Our View: Buy

Share Price: 124p (+4p)

Amid all the doom and gloom and the renewed stock market turmoil, Chariot Oil & Gas gave investors something to smile about yesterday. The group said it had struck a long-awaited deal to bring in one of the big boys to explore for oil off the coast of Namibia by signing a farm-out agreement with BP, the FTSE 100-listed oil giant.

As analysts were quick to highlight, the deal, which will see BP take a stake in one of the blocks, cuts the risk for Chariot, as it gets to keep a material stake in the project while benefiting from the influx of funds.

It also confirms the potential of the project and Chariot's status as a reliable exploration and production company (a valuable thing, given the number of E&P's around). This deal should drive wider investor in Chariot, which should be good for its shares.

Adding to the attraction is the fact that the stock has been pressured since hitting the peak of more than 300p apiece in early March. Part of the weakness may well have been down to disappointment among those eyeing a farm-out earlier in the year. Now that Chariot has delivered, we'd move in for the upswing.

Avon Rubber

Our View: Buy

Share Price: 255p (+13p)

Avon Rubber can trace its roots back to 1885 when two partners bought a derelict cloth mill in Limpley Stoke with its earliest orders from the War Office, the India Office and railway companies. Today, it focuses on three major businesses: it provides rubber products for defence companies, liners and tubing for dairies to milk the cows, and gas masks for the military and emergency services.

The group announced yesterday it had landed a lucrative three-year contract with the US Department of Defense. The deal will see Avon provide filters for use with its M50 gas mask, with the maximum contract value at $38m, and an initial order value of $11m, which will be completed this year. Chief executive Peter Slabbert was confident that, as the sole supplier of this particular filter, "we believe this growth will continue".

The analysts were happy with the news, with Edison saying it supports its positive view on Avon's business "in these uncertain times". Besides, investors should note that the stock trades on just 8.5 times estimated earnings for next year, according to Altium, offering ample scope for upside gains.