Investment Column: This ugly duckling turned Swann is a buy

Costain; Kedco

Our view: Buy

Share price: 517.5p (-20.4p)

It wasn't that long ago that one would look at WH Smith and ask, why? What is the purpose of this shop on the modern high street? Thanks to Kate Swann, that's no longer a problem. Her WH Smith's is in rude health. Sales were down a bit, to be sure, 1 per cent lower at £1.34bn for the year to end August and 5 per cent down on a like-for-like basis. But given the recession and the group's deliberate move out of the difficult entertainment (DVDs, games, CDs) sector where it now only offers a small "convenience" selection, that's not too shabby.

On the earnings front, the company has done exceptionally well. Profits up 8 per cent (before tax and one-offs) to £82m, margins up 220 basis points and plans to return £53m to shareholders. There are any number of high-street rivals that would give their left, and right, arms for those sort of numbers.

It's not over yet, either. The travel operation, which serves airports, stations, etc, should be poised for a boost from a recovery in passenger numbers as the economy improves. At the same time, the group is taking its hospital format into workplaces, where early results look good. All that and another £14m of cost savings identified after £15m have already been made. The yield is a respectable 3.5 per cent, but trading on 11 times next year's earnings – before yesterday's rise – the shares are at a discount of about 15 per cent to the sector average.

Is that really fair? Under Ms Swann the company has become focused on the bottom line, and has a resilient product offering. Her people are keyed into what will sell, as a focus on titles for children and young adults – a sector undergoing a renaissance at the moment – shows.

But it's not just a defensive play, as the innovative ways that Ms Swann has found to expand the format into workplaces shows. So the discount is not deserved. The risk is in Ms Swann deciding her job is done and moving to greener pastures. Green, of course, is the corporate colour of M&S. Ms Swann's staying mum at the moment: "I'm focused on the job I'm doing here." While that remains the case, we remain confident buyers.


Our view: Buy

Share price: 29.25p (unchanged)

The construction and engineering group Costain is one of those companies it is difficult not to like. All the things that normally put us off – bad numbers, poor trading, a hugely inflated price earnings ratio, it's a bank – do not apply to Costain, and investors that have not already cottoned on to the story should be dialling their broker.

The group said yesterday that full-year numbers will hit expectations. It has £800m of its business booked for next year, and is preferred bidder on another £400m worth of contracts.

Andrew Wyllie, chief executive, says the trick is to target contracts where spending cannot be cut, such as motorway maintenance and nuclear decommissioning work, while building up specialist training along the way.

He accepts that the group is not unique, and that more benign economic conditions would be helpful, while the dividend yield is only a moderate 2.9 per cent. But we remain backers of Costain on the group's solid performance. The analysts think there is value in the shares, despite the 36 per cent hike in the last 12 months.

We have been backers of Costain before, and the group has done us proud. As such, we would continue to be buyers of the stock, even if at these levels, the stock is beginning to look a little pricey. Buy.


Our view: Speculative buy

Share price: €0.16 (-€0.02)

Kedco is an Aim-listed company which yesterday reported falling revenues – €5.9m (£5.4m) full-year against €9m last time – rising losses – €6.2m against €5.3m – and had a big red flashing warning light at the top of it screaming "run for the hills". So why are we looking at it? Well, here's the thing. Kedco does renewable energy, and has identified 30 projects – five of which have full planning and permitting granted to Kedco and/or its partners, with one under construction for electricity generation by the end of 2009. Another is in advanced stages of planning and permitting, five are in the early stages of the planning and permitting process, and seven are in the pre-planning and permitting stage.

The long-term market for generating renewable energy is going to grow spectacularly over the coming years, being poised to benefit from both pushes and pulls from legislation, taxation and (most likely) public pressure. Kedco specialises in gasification of wood and wood waste, together with anaerobic digestion of either food or agricultural waste. If that sounds like gobbledegook, it's worth noting that the latter is a process that water companies in the UK have been adopting to power sewage plants on virtually zero emissions. It's speculative, that warning light is still flashing, and investors with any risk aversion should avoid it, but those willing to take a punt could do worse.

Life and Style
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
ebookA unique anthology of reporting and analysis of a crucial period of history
Luis Suarez looks towards the crowd during the 2-1 victory over England
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform