The Investment Column: Cape Group is a safe bet in choppy waters

Lighthouse Group; Speymill
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The Independent Online

Our view: Buy

Share price: 228.25p (-3.75)

Support services may not sound like the sexiest of sectors, but for investors in the last few months it has been a place of refuge in the midst of a volatile market.

Aim-listed Cape has certain other advantages too. The group supports the energy industry, another buoyant sector in recent months, and an imminent move to the main list will also attract new investors, possibly giving the stock price a boost after falling by nearly 20 per cent in the past year.

Yet despite some impressive, forecast-beating, interim numbers announced yesterday, which included a 58 per cent increase in revenues and an impressive hike in profits, the shares fell 1.6 per cent in trading.

Some say this is linked to the fact that the stock is already expensive versus the rest of the sector. Analysts at Panmure Gordon advise that clients sell the shares: "[Cape's predicted] 2008 enterprise value to Ebitda rating of 5.6 times now stands ahead of Bilfinger Berger and Harsco Corporation (a reversal of the year-to-date discount). There may be scope for an earnings increase, but this is unlikely to be carried into future years given doubts over the global economy."

So, a sell then? Well, not necessarily. The truth is that the analysts are having a hard time agreeing. Indeed, those at Collins Stewart say that, "we continue to believe the group's attractions to investors in terms of the markets served, the territories covered, the covenant of customer and the opportunities for building a more rounded and longer term offer. Cape remains on track to move up to the main market next year. These shares are cheap on a price-earnings of just eight times, especially with debt coming down."

Investors could be forgiven for being a little confused. However, the group is a safe bet in choppy markets, and the move to the main list should attract new followers. Even though the shares do look a bit pricey, investors are getting an increasingly more attractive stock for their money. Buy.

Lighthouse Group

Our view: Hold

Share price: 19p (-1.75)

"A safe port in a storm," is how executive chairman, David Hickey, describes the financial advisory and wealth management group, Lighthouse. Maybe, although investors with a perfectly rational aversion to anything financial at the moment may see the company more as shining beacon, warning them to avoid a treacherous sector.

Lighthouse targets its activities at middle England and people, typically middle aged, that have between £50,000 and £1m to put to work. These folk seek advice more readily in a downturn, argues Mr Hickey, and while Lighthouse will never be immune from a recession, the blow is softened, he adds.

The group's interim numbers issued yesterday were a real mixed bag. Turnover and pre-tax profits were down, although the company will be paying its maiden dividend. An imprudent move? Not at all says Mr Hickey, who points out that with £12.5m in cash on the balance sheet and no bank debt, Lighthouse can easily afford the payments. It is also axing jobs and expects to save about £1m.

Indeed, the group says that it has been criticised for not giving away more cash, but argues that having a strong balance sheet in times of woe is no bad thing: "with its strong balance sheet and good regulatory record Lighthouse should benefit from the continuing dislocation amongst its competitors," agree supportive watchers at Shore Capital.

However, because of its sector, Lighthouse is certainly not a punt for investors that want a chunky return in the near future. A turn in the economic cycle is likely to be some way off and it is difficult to see where growth comes from for Lighthouse shares in the short term: there are certainly groups out there with more spark. Hold.

Speymill

Our view: Cautious hold

Share price: 26p (-3p)

However you look at property investment group Speymill's interim numbers published yesterday, they are good. Turnover is up, impressively by 60 per cent, while pre-tax profits rose to £3.2m from £1.4m this time last year.

Nonetheless, the share price took a spanking yesterday, closing down 10.3 per cent.

The group says that the drop in the shares makes them even more favourably valued: the property investment arm, which invests largely in Macau and Germany, is doing nicely and is geographically protected from the meltdown in the UK property sector. Indeed, it is the combined effect of having a strong retail following, being a microcap and the fact the UK market is faltering that has resulted in the shares falling by more than 75 per cent in the last year, the company argues.

There is another reason too, however. The group's other main division, its contracts business, which operators in the hotel building and refurbishment sectors, has had a torrid year, has contributed nothing to the overall numbers and has future write-downs to come. Speymill is a generally solid company and with more hotels expected in the next few years, its troubled contracts business has the potential to recover. There is unfortunately more bad news to announce however, and as such investors should be very careful. Cautious hold.

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