Investment Column: The Sage advice is to hold for the moment

Provident Financial; Games Workshop
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Our view: Hold

Share price: 191.7p (+6.3p)

During the Gold Rush in the Wild West, it was an old adage that those who sold the tools were the ones who made their fortunes. In the current climate it could well be the reverse. As businesses struggle in the downturn, those that provide support services do not look like a good bet.

Sage is in the business of just that, providing software and services. It says it "lives and breathes business every day", which basically means it provides technology to ensure, among other things, the smooth running of small to medium companies. This includes operating the payroll, managing customer and supplier relationships and managing the finances. All this had helped Sage to grow from a small Newcastle company in 1981 to the UK's largest software company, employing almost 15,000.

Yesterday Sage said that trading in the third quarter remained difficult after a tough first half as software sales fall around the world, although that has been offset to some extent by its services division outside the US. The company still looks solid enough, with good cash flows, and a cost-cutting drive to salvage margins. The group also pointed out that companies were not yet ditching contracts or trading down.

Investors were relaxed following the number-light announcement, especially as the management did not slash forecasts for the full year. There was further good news as net debt reduced from £558m in March to £491m.

The multiple of 11 times Investec analysts' estimated earnings in 2009 looks about right, with a solid dividend yield of 4.2 per cent, estimated to go up to 4.4 per cent the following year. Sage is one of the picks of the sector and should be resilient enough in the coming months, but we have enough concerns about the economy and Sage's US business to be wary of wading in. Looking for some Sage advice? Hold.

Provident Financial

Our view: Buy

Share price: 799.0p (-56p)

Provident Financial is a company that is very hard to like. It sells high-interest loans to low-income groups – Barnado's, in a damning report, has highlighted rates of up to 500 per cent, and has complained to the Office of Fair Trading. Investors can not ignore these issues because, with a groundswell of opinion rising against the company, it would be a politically easy target to strike at. Provident has long argued that it is the only game in town for the sort of consumer who is shunned by mainstream lenders. It is also true that some of the alternatives – such as pawn brokers – are hardly any more savoury, while government efforts to encourage credit unions have had only limited success. Provident has had a number of problems in the past, but has ironed many of them out, while its main rival – Cattles – finds itself in dire straits. With mainstream lenders reluctant to advance money to anyone other than people with cast-iron credit ratings, it therefore ought to be doing well. The figures suggest that it is. Provident is almost unique in being a financial services company that is actually increasing profits (by 3.5 per cent to £53m in the first half) and bad debts remain more or less under control.

As such, the forecast multiple that the shares sit on – 11.7 times 2009 earnings – is not overly demanding, while the prospective yield – 7.4 per cent and likely to rise – is attractive. The regulatory risk facing the company should not be ignored, but notwithstanding that, the investment case is very strong. So the recommendation has to be buy. If you can stomach it.

Games Workshop

Our view: Hold

Share price: 309.0p (-6p)

In the age of the Nintendo DS, broadband internet and multichannel TV, there is something oddly comforting about the success of Games Workshop. Despite a myriad of bleeping things vying for attention, a sizeable number of boys still get a kick out of buying and painting small miniature figures before sending them into battle on the table top.

This has made for a very successful business. It all seemed to be going awry a couple of years ago, but the problems seem to have been fixed, debt has been paid down and the business is going like a train, with full-year profits of £7.5m against £1.1m last time, ahead of expectations, albeit flattered by currency movements. GW's success is no big secret – it more or less amounts to loving the customer and giving them what they want (a lot) more efficiently. But there is still room for expansion, not least overseas. The shares have reflected this over the past few months, and now sit on an rating of 16 times next year's forecast earnings (there's no dividend). That's steep but justifiable if the company can continue its run. Hold for the moment, but buy on weakness.