Investment Column: This ugly duckling turned Swann is a buy
Friday 16 October 2009
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.
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