The Investment Column: Money printers De La Rue are sound as a pound

Grainger; Mothercare
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The Independent Online

Our view: Buy

Share price: 895.5p (+3.5p)

At this point in the cycle, cash is king, say economists. If that is so, a group with a licence to print money is probably worth looking at.

And De La Rue is definitely worth a punt. The company has returned the nearly £500m to shareholders over the last four years and, according to watchers at Panmure Gordon, "there is still a thriving business on top of that". The group, which prints bank notes for the UK and other countries, announced full-year numbers yesterday, with profits up 23.7 per cent.

The company also said it plans to sell its other division, cash services, which observers expect to raise as much as £400m – more good news to investors, as is the £160m special dividend.

The only question that investors need to answer is whether or not all the hype is already factored in to the share price. Not at all, say those at Dresdner Kleinwort, who argue that although De La Rue trades at a premium to the rest of the sector, it is still likely to see lots of growth. Panmure Gordon analysts say it is a unique business without a sector at all, and investors should consider the progress made by the group in the last few years. They reckon the group's shares will hit 995p and that would improve an already impressive earnings per share growth of 32p.

The chief executive, Leo Quinn, says that the group will only sell the cash services division of the business, which makes up about 30 per cent of the company, if the price is right. This may mean that it takes a while, but with £107m on the balance sheet, it hardly matters.

As with any business, there are the usual risks, but the case for the group is sound. De La Rue is a solid growth stock and about as defensive as they come. Buy.


Our view: Hold

Share price: 351p (-4.25p)

Here is a story you will not see every day: a property company that, in a perfect world, investors should buy. Grainger is a residential housing group that owns about 20,000 homes across the UK and more in Germany. And before investors assume that all property equals sell, there are some compelling reasons to look at the stock.

Ninety two per cent of the group's property is let under a regulation scheme where rents are set by the rent officer and rise on average by 11 per cent every two years.

And on the 8 per cent of the portfolio that the group sells each year, prices rose by 4.5 per cent. Chief executive Rupert Dickinson says that since the end of March, Grainger is getting better prices for its property than it was at the end of September last year.

The company issued upbeat half-year results to the end of March, with pre-tax profits down £200,000 to nearly £12m; not bad given the state of the housing market. The group concedes the sector is "unquestionably difficult", but argues the company is being dragged down by the rest of the market. And anyway, he says, the poor sentiment has already been priced into the shares, which are down from a year high of 646.5p. He's not the only one. Analysts at Arbuthnot say that, "as the share price is 355p [close on Wednesday], which is a 45 per cent discount to [net asset value for] 2009, we think the shares look good value on a medium-term view."

Sadly, with more mortgage companies cutting lending – Nationwide announced yesterday that it has halved the amount it lends in the last year – companies like Grainger will suffer. When the market improves, investors should back the stock, but now is not quite the time. Hold.


Our view: Buy

Share price: 393p (-2p)

Many investors in retail shares have endured a torrid year, as the market has been buffeted by the chill winds of the credit crunch. But baby and maternity wear retailer Mothercare's shares have sailed high above the slumping sector for the past six months.

And yesterday, the group posted underlying pre-tax profits up 70.8 per cent to £38.6m, although this excludes exceptional costs including those related to its acquisition of Early Learning Centre (ELC) last year. Mothercare posted a 2.9 per cent increase in UK like-for-like sales which, notably, held up in the second half. A further tonic was a 70 basis point improvement in UK gross margins.

Mothercare also said it expects the acquisition of ELC to deliver synergies of £10m in the second full financial year after the take-over.

A potential cloud for investors is that Mothercare shares are trading on a price to earnings ratio of 13.7 against a multiple of about 10 for the sector for the financial year 2009, according to ABN Amro. But given its burgeoning international revenues, well-regarded multi-channel business and sales growth to come from ELC shop-in-shops in out-of-town Mothercare stores, the retailer's shares still look a safe bet, particularly if the consumer downturn improves next year and investors return to retail. Buy.