The Investment Column: Credit crunch leaves Experian looking for significant cost cuts

Character Group; ClinPhone
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Our view: Avoid

Share price: 362.75p(-12.25p)

Experian, the leading credit checking agency, has been in freefall since the credit crunch gripped the throat of its major banking customers last summer. There appears little early prospect of a recovery in the share price, which took another knock yesterday.

Experian, demerged from the retail giant GUS in 2006, is a frontline casualty of the crisis enveloping the world's financial institutions. As banks cut back on loans and mortgages, the need for firms such as Experian to run credit checks has slowed dramatically.

Experian reported a mere 2 per cent improvement in business in the third quarter to the end of December. A year ago it was seeing a 7 per cent rise. The latest figures are half what some analysts expected, although in current conditions those forecasts now look overly optimistic.

In the UK and Ireland growth was flat, triggered by falls in unsecured lending and mortgage approvals.

The group is not anticipating any early pick-up, although profits for last year will come in around market expectations.

Banks account for half of Experian's revenue, so the paralysis in the market places Experian in a straitjacket. Wriggling out will require considerable dexterity and a marked improvement in sentiment, so in the meantime Experian is turning its attention to its own cost base. Merger of data centres and outsourcing of some services will cost £55m but deliver annual savings of £40m.

The size of the cuts suggest Experian was beginning to develop some fat around the edges.

Profits for last year should come in at around £411m, but current forecasts are expected to be trimmed.

The shares have fallen 40 per cent since last July, and it is probably still too early to buy for the bounce. Avoid.

Character Group

Our view: Hold

Share price: 81p (+9p)

The stock market is starting to behave like a badly treated dog. Ignore it for a while and then throw it a bone and it will lick you all over. It is certainly exhibiting that sort of behaviour judging from its enthusiastic reaction to a promising but by no means exuberant trading statement from Character Group, the toys, gifts and games group.

The shares have been in the doghouse since the company had to withdraw Bindeez, a bead kit for children unfortunately coated in a chemical that could act as a sedative. Although Character only distributed the product for an Australian manufacturer the shares were caned, especially as it also anticipated a disappointing Christmas.

Suddenly summer has arrived. Character said that while the first half of this year will be tough, it expects "substantial revenue growth" in the second half. The finances are in good shape, with scope for buy-backs.

The company says retailers like some of the new toys and games coming through – they will be seen at this month's London Toy Fair – especially a new range of Dr Who products. But with family budgets under growing pressure, some children may not get what they want.

The firm's broker said it was " back on track", and the shares initially jumped 18p or 25 per cent before settling for a 9p rise.

On current forecasts of £8mprofit for this year, the shares sell on 6 times earnings – not expensive, but it is a bit early to be celebrating Christmas. Hold.


Our view: Hold

Share price: 63.25p (+9.75p)

ClinPhone, which provides computerised progresson clinical trials on new drugs, was heavily sedated when a spate of problems led to cancelled orderslast year. The shares crashed.

Having swallowed its medicine – improving its systems, which were clearly inadequate, and overhauling its costs – it is winning orders again. In a promising trading update, the firm said revenue for the third quarter was up 18 per cent and results would come in well ahead of expectations. Brokers expect around £1.2m. The order book remains strong.

The recovery is impressive. ClinPhone was forced into two profit warnings, trimming the shares back from 170p – they had earlier topped 225p – to 40p.

ClinPhone enables patients taking part in clinical trials to phone in their daily symptoms using a voice recognition automated telephone system. This helps to provide more accurate and regular data for the drug companies. Operational problems triggered by its telecoms supplier led to £4m of work going elsewhere.

But ClinPhone has done well winning new orders, especially among biotech companies, underlining its reputation as one of the leaders in the field. Prospects are good, with 70 per cent of health companies still using paper-based systems to monitor drug trials.

But such an early slip so soon after floating – they listed at 148p in June 2006, raising £56m – leaves the market in an unforgiving mood, and the shares will need a little longer in the recovery ward before they see any significant appreciation. Hold.