The Investment Column: International Greetings: more bad news on the cards

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The Independent Online

Our view: Avoid

Share price: 49.75p (+2p)

It is a safe bet that there was little seasonal goodwill last Christmas at International Greetings, the cards to wrapping paper and stationery group.

Not only was trading poor but it looks as if management was concentrating more on the mince pies than running the business.

Shareholders who have seen the value of the com-pany shrink from £225m to £22m in three years will now have the final divi-dend snatched away from them after a sharp slide in profits.

Workers could also pay with their jobs as the com-pany undertakes a restructuring of its manufacturing operations. About 350 are employed in South Wales.

The crisis was triggered by worse-than-expected trading in the run-up to Christmas. Supermarkets, one of the biggest customers for its wrapping paper and other goodies, squeezed prices even more than feared.

But there were more deep-rooted problems suggesting management had taken its eye off the ball. A trading update points to manufacturing inefficiencies, unexpected freight costs, higher-than-expected bad debts, and increased stock provisions. In fact, everything that could go wrong did.

It is now clear that the present structure, with plants in the UK, Eastern Europe and China, is no longer viable. A strategic review looks certain to sell plants and outsource manufacturing. Brokers estimate that could cut £5m off costs, while unwanted factory disposals could fetch another £5m.

The future of other parts of the group will be looked at closely. The group has expanded from cards and wrapping paper to take in the Tom Smith cracker business, children's books, photo frames and a franchise business selling Hallowe'en merchandise.

Axeing the dividend will save around £3m but current year profits will still fall from £18m last year to £3m. For 2009, estimates of £12m have been slashed to £6m. The shares fell 25 per cent before recovering on hopes there will be a bid. You would be crackers to buy.

RWS

Our view: Good value

Share price : 339.5p (+7p)

Think of all those cross-border deals taking place every day in Europe. They generate complex amounts of paperwork in different languages based on different legal systems. The task of translating the documents and making sure important patents which companies claim to own are in order is driving earnings of the AIM-listed RWS, one of Europe's leading providers of intellectual support services. It is estimated that 200,000 patent documents are published every year in Europe.

Having increased sales and profits consistently since floating in 2003, RWS is now snapping up one of its main rivals in Germany as well as flagging up strong growth in the first quarter. DSC, which is being acquired for £6.8m, has blue-chip clients including SAP, Daimler and Grundig. The deal will beef up RWS's activities in Germany, one of the key markets for technical translations.

The deal is timely because RWS was braced for a £2m fall in earnings over the next 18 months following changes in patent law which means companies no longer have to go to the expense of translating documents into as many languages as before.

The contribution from DSC should add £800,000 to 2008 profits, pushing them up to £13.8m or 13.7 times earnings. The shares are up 18 per cent in the last year. Good value for a company in pretty much a recession-proof niche.

Patsystems

Our view: Fairly valued

Share price : 26.5p (+0.75p)

Société Gé*érale rogue trader Jérôme Kerviel was able to exploit weakness in the bank's security to fleece it of billions. The episode is likely to stimulate increased demand for the sort of soph-isticated risk systems dev-eloped by the UK software developer Patsystems. Sales of the product, which have doubled in a year, alert management immediately to breaches of trading by their dealers as it happens. SocGen is believed to have installed back office-based systems which allow dealings to be examined the following day – when it may be too late.

Patsystems' main business is providing software which enables trading of derivatives. There has been rising demand for its key product, the Pro Mark trading screen, from large brokers and investment banks where there is a high volume of trading and where dealers need to arbitrage and set up complex positions between markets.

Last year, pre-tax profits grew 43 per cent to £3m on revenue up 11 per cent at £17m, of which more than 80 per cent is recurring, underlining the stable nat-ure of its client base. During the year, it won new business from investment group Macquarie and RJ O'Brien, one of the largest independent futures brokerages in the US.

The number of installations is expected to nearly double to 700 in 2008, when profits are expected to grow to £3.8m, putting the shares on a multiple of 13. Bid talk surrounding the group persists. On trading grounds, they seem fairly priced for now.

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