Investment Column: The moment has passed to sell Northgate

Carluccio's; Micro Focus International
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The Independent Online

Our view: Tentative hold

Share price: 103p (-31.25p)

The Investment Column recommended selling Northgate shares six months ago, but the moment has passed for all but the most desperate. At that point the company was already warning of flat growth in the commercial vehicle leasing market over the coming year, and it was saddled with £894m in debt. Disappointing half-year results published yesterday, and the attendant 23 per cent drop in the share price, confirm the pessimistic prognosis. But anyone who did not seize the opportunity to get out in July, would be better to hang on if they can.

The numbers make grim reading. Group revenue may be up by 11 per cent, but pre-tax profits slumped 46 per cent. In the UK, operating profits are down by 28 per cent; in Spain by 16 per cent. Even worse, the results are for the six months to October, so do not account for the economy's accelerating slump since.

On the plus side, the company renegotiated its financing in September, although UBS, the house broker, warned yesterday that Northgate has "limited headroom" on its covenants and if residual values fall much lower, there is a still a danger of breach. An investor with even a medium-term plan should cut their losses and sell. If you can stick it for the longer term, Northgate is a tentative "hold".

Carluccio's

Our view: Sell

Share price: 61.5p (-1p)

Carluccio's' shares have already fallen to about half the value at which they traded in the summer. The Italian-themed diner and coffee-shop chain is however still priced substantially higher than its peers, with a value about 10 times projected earnings, compared to about eight times among similar traded companies.

To some extent this is justified. It faces the oncoming recession carrying less debt than peers, has a wide variety of different locations and it benefits from an established brand. However it has ploughed cash into opening outlets recently, including one in Dublin, and is building its first restaurant in Dubai – just as the credit crunch hits the Gulf state. The company has also yet to address the potential upward impact on its costs from September of proposed legislation limiting restaurant companies' ability to top up staff wages to the national minimum through credit card tips.

So while it may be a better investment than peers and benefits from a flight to quality as others buckle under excessive debt, we think the shares have yet to fully reflect the slowdown that Carluccio's is likely to face next year as the recession worsens. Cash-strapped consumers worried about the future of their jobs are unlikely to want to fork out for the premium Italian imports in the shops' delis as they return to value retailers for their Christmas and New Year's fare.

The slight fall in its share price and the analyst downgrades it saw yesterday when it announced results imply that, while it maintains trading is in line with its expectations, those are less rosy than market's. Sell.

Micro Focus International

Our view: Hold

Share price: 266.35p (+6.25p)

Micro Focus, the UK software group, has enjoyed a pretty solid first half, as it managed to shrug off the worst excesses of the crunch. But as with so many companies at the moment, individual performance is secondary to the wider market. The shame for Micro Focus, despite cracking numbers, is that now is probably not the time to invest.

The group reported a strong interim statement yesterday. It posted a 37 per cent pre-tax profit rise over the first half of last year as the appetite for low cost technology packages held firm. Technology firms have staved off the worse of the downturn, but sector experts believe the industry to be "late cycle" and could well face a rougher ride going into next year. As corporate clients come under pressure, licence wins and renewals are likely to slow.

Micro Focus looks solid. It has a good management team, and analysts have backed its so-called "mini-Sage" acquisition strategy. Yet we feel the share price is pretty fairly valued and the company will struggle to shake off the wider slowdown. Hold.

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