The Investment Column: Aegis on the up despite gloom inthe media sector

Home Retail; BBA Aviation
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The Independent Online

Our view: Buy

Share price: 126p (+9p)

If investors lump advertisers in with the rest of the media sector, the chances are they will run a mile from companies such as Aegis, which advises clients on how to spend marketing budgets. But those willing to look a little bit closer will see that advertising groups are on the up. And Aegis is the jewel in the crown.

The analysts queued up yesterday to recommend a buy on the stock after an upbeat management statement said that organic growth had risen 8.3 per cent in the first quarter, ahead of most expectations. The outlook is strong too: "We continue to believe that Aegis is better placed than most of the agency groups to deliver strong organic growth in the near and medium term," say watchers at Citigroup. They add that while the group's estimated price earnings ratio of 13 times for 2008 represents a premium to its peer group, it is justified by Aegis's performance.

The company also makes great play out of the additional business that has been brought in over the past six months or so, and that the group is already 26 per cent digital, and growing.

Investors must weigh up whether this performance and the encouraging growth numbers are already priced into the shares. No, say those at Numis, who suggest that the stock will rise to at least 145p in the near term.

A worsening economy can only dampen clients' advertising budgets, and the Citigroup analysts caveat their buy advice by saying that the sector is high risk. However, in fairness to Aegis, it has continued to beat the forecasts. Morgan Stanley had it marked down for growth of 7.6 per cent in the first three months, and says that Aegis' performance "gives the market further confidence that advertising is not weakening". Buyers certainly thought the stock was worth a punt yesterday as the share price jumped by 7.7 per cent. Buy.

Home Retail

Our view: Sell

Share price: 264p (+21.25p)

The year to February was a cracking period for Home Retail, owner of the Argos and Homebase stores. But not even the company is predicting that the next 12 months will come close to being as rosy.

"I am torn between admiring what they have done and fearing for what might lay in wait," says one analyst at Pali International after Home Retail posted a pre-tax profit of £426m, up from £321.2m in 2006, which sent the share price soaring by 8.75 per cent. The numbers were buoyed by impressive cost savings made by increased combined purchasing across the group.

Argos is the star performer, contributing 90 per cent of revenues last year, and delivering a 15 per cent rise in profits. The group concedes that Homebase has made a "weaker than anticipated start to the financial year". Like-for-like sales at Homebase are expected to fall by as much as 6 per cent this year.

The chief executive, Terry Duddy, reckons that the group's straight talking is appreciated by the market, but with UK retailers preparing to face a downturn in activity led by fears of a recession, talking straight or otherwise will not prevent nervy investors from selling.

"Given the greater weighting of Argos in the group, we are not particularly tempted to reduce our £390m [profit before tax] forecast any further, despite the bad Homebase vibes," says the Pali analyst. But "the shares have been hit very hard by the shorts, given Home's pure UK, 'big-ticket' exposure and the prospective PE rating of only [about] 8 times is not very demanding. We can't see it improving that much in the current climate and our price target of 270p is under review."

Most analysts reckon the group is undervalued versus the rest of the sector. Kingfisher, for example, trades at a premium, but that is possibly deserved given its higher proportion of freehold property.

Home Retail is a solid retail stock, but investors buying today are likely to lose money. Sell.

BBA Aviation

Our view: Hold

Share price: 157.25p (+10.5p)

The aviation services group BBA has had a torrid time in recent years; in the last decade the stock has traded lower than at present levels only once for a brief period in 2003. Investors have abandoned the group in their droves. But after a positive trading update yesterday at least some returned, pushing the share price up by 7.2 per cent.

The company says that revenue was up 12 per cent in the first quarter, 7 per cent of which was made up by increased fuel prices, which can be passed on to customers.

It reckons that while the market is volatile, its North American business "appears to be stabilising". Analysts at Panmure Gordon agree, but say that the stabilisation is at disappointing levels. They say that BBA is in prime position to be taken over this year, adding that the group is in denial about decreasing margins.

The company is a solid operator in its sector, although recent share performances should not really inspire potential buyers. The clincher for any investor would be the hope of a buyout. Hold for now.

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