Investment Column: Woeful markets make Charter a bad bet

PZ Cussons; Intercede Group
Click to follow
The Independent Online

Our view: Sell

Share price: 476.25p (-87.75p)

When Charter International released its trading update to the Stock Exchange yesterday, there was none of the usual helpful telephone numbers for the press and investors.

An oversight, says the group, even if the statement was not the sort of thing it would normally be too keen to shout loudly about. In truth, life has got very tough for the company in recent months as trading conditions have softened. The market finally caught up yesterday, with the stock falling by 15.6 per cent.

Its chief executive, Mike Foster, warns that unless the macroeconomic situation improves on May's woeful offering, full-year profits will be "materially lower than ... previous expectations". He adds that there has been no sign of things getting better so far in June.

The group's biggest division, its welding group ESAB, has struggled as export-led economies have dipped and inventories have been slashed. Even so, when the good life returns, the company will be fitter than ever before, says Mr Foster, who adds that further cut-backs will be implemented if necessary.

The bull case is not without its supporters. The analysts at Killik & Co point out: "Despite the deterioration in May, the group remained profitable in all months and markets and, given these factors, we would expect the dividend to remain a feature – historic yield is 4.4 per cent... placing the shares on 10 times to 12 times. We feel Charter has long-term attractions for investors looking to build positions to benefit from economic recovery and would see today's correction as an opportunity to invest."

The argument that the company will survive the recession, ergo the depressed stock is worth buying, is wheeled out by lots of struggling companies. It does not wash. It may be the case that investors do well in the long term from holding Charter shares, but with even Mr Foster admitting there is no end to the current woe in sight, there is more to be made by holding other stocks at the moment. Sell.

PZ Cussons

Our view: Buy

Share price: 182.5p (+0.5p)

Reading the analysts' coverage of Imperial Leather soap maker PZ Cussons will leave some investors a little dazed. Analysts at Panmure Gordon, one of the group's house brokers, say: "trading on [a] 13.2 times price-earnings ratio and 7.1 times enterprise value to Ebitda for fiscal 2010, which given the growth prospects of the group in our view, remains an attractive rating."

So, the shares trade at a discount, yesterday's trading statement said that everything is fine and the group is confident of hitting its targets for the full year: call the broker and buy stock before someone else thinks it is a good idea.

Or not. The experts at the other house broker, Cazenove, point out that "[the] shares have rallied considerably since the last update and are now trading on [a] 15.5 times price-earnings ratio and an enterprise value to Ebitda of 7.1 times". The watchers argue that the stock now trades "in-line".

Confusing? Maybe, but we are tempted to buy. The group operates in a defensive sector in the UK and with its exposure to the Nigerian economy, which is largely cash driven and underpinned by improving oil prices, we think it is safe bet, even if there is not much juice left in the shares.

PZ Cussons has little debt and its plan to grow earnings by 10 per cent is on track. Its finance director Brandon Leigh argues that special offers, which put little pressure on margins, are a good way of combatting consumers trading down to private label brands.

We do not think investors will make a killing from owning PZ Cussons but we do reckon the group is a safe bet in these still volatile markets. Buy.

Intercede Group

Our view: Buy

Share price: 47p (+4p)

Shares in Intercede, the company that makes the software that fits with ID card systems, were up 9.3 per cent yesterday after the group's solid full-year results.

The company, which refuses to say if it has had talks with the UK Government about the planned national ID card scheme, announced a pre-tax profit of £1.4m, after a loss in 2007: "This was the year when Intercede bridged the chasm between market opportunity and commercial success," said chairman, chief executive and majority shareholder Richard Parris.

There are concerns, particularly about patent disputes with a rival in the US, and we cannot see yesterday's increases being repeated for a while. The stock was already pricey, even before yesterday's spike. However, with demand for ID cards on the increase, we would be buyers. Buy.