Investment Column: The downturn may still hit Segro eventually

Tomkins; Latchways
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The Independent Online

Our view: Cautious hold

Share price: 302.5p (-4.75p)

On the face of it, the property investment and letting group Segro's market update yesterday was encouraging: the Reit let double the amount of space in the third quarter compared with the same period last year, despite the conventional wisdom being that the property market is teetering on the edge of the abyss.

There was the bad news as well, however. The finance director, David Sleath, says that while the group has not yet felt the impact of an economic slowdown, it is none the less on its way.

Inevitably, there will be deterioration in the value of the company's portfolio, which it did not update yesterday, although Mr Sleath reckons that the Investment Property DataBank's estimate that capital values of UK industrial properties will have declined by 6.1 per cent over the third quarter will not be too far off the mark.

Segro is trying its best to mitigate the pain it expects to feel in the UK by moving more resources to places such as Poland, but that will not be enough if watchers at Cazenove are to be believed, even if Segro's stock looks cheap against others in the sector. "The shares have performed broadly in line with the sector year to date, down 35 per cent, although during the last month the shares have underperformed the sector by 13 per cent. At 307p the shares are at a discount of around 30 per cent to our provisional revised bottom of the cycle net asset value and are beginning to look slightly better value on a longer term view, especially given the prospective dividend yield of 7.6 per cent. However, given our worries about the potential for dividend/dividend growth cuts (if vacancies rise as a result of a severe recession) and further valuation falls we retain our under-perform recommendation."

Segro is a well-run group and investors should keep the stock longer than most of the rest of the sector. The economic slowdown, however, could severely dent returns. Cautious hold.


Our view: Sell

Share price: 118.5p (-5p)

When a company starts arguing about how resilient it is in the face of a downturn, rather than about what it is actually going to do to generate growth, invariably it is time for investors to sell.

The engineering group Tomkins falls into this category, and while the company's chief executive, Jim Nicol, should be applauded for his candour, shareholders will take no solace from the fact that Mr Nicol thinks things will remain tough and uncertain.

The group's share price was down 4.1 per cent yesterday as Tomkins published a market update saying that "our end markets have worsened considerably since our last update. We expect deteriorating global economic conditions to affect the remainder of the year."

The company operates largely in the automotive and building sectors, which must be two of the most toxic sectors about.

Mr Nicol points out that the group is in robust shape and that moving more of its work to the higher growth emerging markets will cushion some of the blow. Moreover, Citigroup advises its clients to hold the shares and reiterates its 115p price target.

However, with the company itself predicting tougher times ahead, it is inconceivable that the share price will remain static. Investors are likely to have to take a hit on a Tomkins punt, and as such should not entertain the prospect. Sell.


Our view: Buy

Share price: 675p (+57.5p)

Latchways makes safety equipment to stop people falling off the roofs of high buildings. In light of the group's interim results, published yesterday, investors may wish to consider the company's stock to help stop their portfolios crashing through the floor.

Operating profits were up 11 per cent, with the company adding that it is yet to see any effect of the economic slowdown. In short, business is booming.

In Europe, Latchways makes most of its money from retro fitting existing buildings. Regulation in the UK dictates that buildings need much of the equipment that Latchways produces.

Investors should always be careful to buy strong companies in a downturn, and Latchways falls into that category. However, buyers should also be concerned by the stock's liquidity and that the group's share price can fall as much as £1 on the trade of just 1,000 shares.

Another worry should be the stock's rating, which even according the group's own brokers at Brewin Dolphin is expensive. Trading on a 2009 price earnings ratio of 13.4 times, the shares are at a 40 per cent premium to rest of the support services sector, which the watchers say is justified given the "nature of the business's regulatory driven end markets".

While recognising the risk of small-cap investments, Latchways is none the less a safer bet than most. Buy.