Investment Column: Textile firm Davis was too honest for some

International Personal Finance; Abbey Protection
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The Independent Online

Our view: Hold

Share price: 234.5p (unchanged)

Panmure Gordon said that yesterday's trading update from the textile maintenance company Davis Service Group was "probably as good as it gets".

With the group on course to hit full-year numbers, debt at manageable and well-funded levels and the company saying it is taking "action to align our cost base to the current trading environment", it is tricky to disagree.

The chief executive, Roger Dye, argues that the group says it like it sees it, and does not think the company acted with undue haste in August when it issued a profits warning on fears of rising fuel and energy bills, some of which have now subsided. There will be investors that wish Mr Dye had been a little less than brutally honest, however: the stock traded above 400p before the cautionary update.

The company processes textiles from hotels, healthcare groups and industry, and while the outlook is unclear, Mr Dye reckons that Davis is well equipped to deal with changing markets. Interestingly however, despite the shares falling by more than 50 per cent in the last year, he will not say that the stock is cheap, preferring to let the market decide the appropriate level.

Perhaps Mr Dye likes to leave it to the analysts. Those at Panmure Gordon argue that "on a current price earnings ratio of 5.5 times with a yield of 8.4 per cent, a well-funded balance sheet and exposure to defensive industries such as pharma, we remain buyers, though have lowered our target price both as a result of lower 2009 earnings per share and the change in market conditions since the last update".

We would be a little more cautious. Even though the group says that it is well versed in dealing with slowdowns, in any downturn things will get tougher, and investors may be less willing to jump into bed with a group that has already issued a profits warning, no matter how honest it is. Hold.

International Personal Finance

Our view: Cautious hold

Share price: 155.5p (-9.5p)

As we have all become uncomfortably aware in recent weeks, debt plays a huge part of the UK economy, and will be one of the contributory factors in sending us into a recession.

International Personal Finance, which offers small, short-term loans to customers in central and eastern Europe, reckons that its markets will survive the worst of a slowdown, partly as people in the likes of the Czech Republic and Hungary have limited personal debt. Ironically enough, the company reckons it will get the opportunity to add to people's debt as western banks reduce their activities in these markets, opening a category of customers with better credit ratings.

Despite what sounds like a rosy outlook, investors should be cautious. Analysts at the joint house brokers, Dresdner Kleinwort and Citigroup, downgraded their share price targets yesterday. Citigroup said that the best investors could hope for was a return to 200p, after previously saying that 325p was in the offing – despite the company saying the full-year profit expectations were on target. The shares last traded above 200p less than a week ago.

The watchers at Dresdner argue: "Our previous sum-of-the-parts valued International Personal Finance's established operations at 14 times 2008 earnings, and we have cut this to 10 times until greater clarity emerges in terms of market volatility and the global macro outlook." Investors would be wise to wait until this greater clarity emerges. Cautious hold.

Abbey Protection

Our view: Buy

Share price: 65.25p (unchanged)

Colin Davison, chief executive of Abbey Protection, has a problem. On the one hand, his company, which offers legal advice and insurance to small companies facing employment tribunals and tax investigations, clearly has defensive qualities. As the recession bites, so companies sack more people, many of whom are often disgruntled.

That is the good news. The bad news is that as Mr Davison admits, in these uncertain times it is difficult to get investors to listen to a small cap story, no matter how attractive the business model. In fairness to the investors, as nearly every listed company has been pummelled in recent weeks, Abbey's shares have dropped just 3 per cent in the last three months: a good performance in anyone's book.

The group announced yesterday that it has added a small acquisition in its tax arm, but it is the fact that the shares have remained stable in the last quarter that should interest buyers. Watchers at Numis agree, saying: "we continue to believe that the group's low volatility earnings and steady organic growth prospects merit a premium price earnings rating, and therefore reiterate our target price of 75p and 'add' recommendation." Buy.

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