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The Week In Review: More trouble in store for Big Yellow

Edited,Andrew Dewson
Saturday 01 December 2007 01:00 GMT
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Big Yellow Group has had a torrid year. After hitting all-time highs of more than 700p a share on the first trading day of 2007, the stock has been in permanent decline ever since.

So what is it that investors don't like about the group? It has maintained a relatively healthy yield on its portfolio, and has made a good success of launching new outlets to achieve steady growth.

The problem is that slowing house prices and a fragile economy have the power to derail Big Yellow's progress. With more than half of the group's customers accounted for by home-movers who need somewhere to store excess possessions whilst in transition, the slowdown in the housing market is bad news.

Meanwhile, the outlook for commercial property is not so hot either, meaning that companies such as Big Yellow may see the value of their property portfolios fall at the same time as they are struggling to fill their free space.

Although the long-term prospects for this group look promising, the short-term outlook is bleak. Investors are advised to sell their holdings and seek shelter elsewhere.

De La Rue

De La Rue is one of the few companies in the world with a licence to print money. Demand for banknotes and the ever more sophisticated measures taken to prevent forgery should mean that business remains buoyant for the foreseeable future. Investors should be aware that political instability is always a possible fly in the ointment, as is the price of cotton, which is the most common material used to make notes. However, momentum remains strong and even the weak dollar is having little material impact on De La Rue.

Intec Telecom Systems

Intec Telecom Systems has had a rocky ride over the past few years but a change in management early in 2007 appears to have had the desired effect. Chairman and acting chief executive John Hughes believes that while the company has lowered costs substantially by cutting jobs, sharpening up its internal processes and systems has also helped improve margins. The stock looks good value, trading at less than 13 times 2008 forecasts and with 30m of tax assets and cash on the balance sheet, Intec looks set for a decent year.

KCom

KCom shares hit a 12-month low earlier this week as the Hull-based telecoms and internet provider continued to suffer on the back of October's warning. This week's interim results split opinion with some watchers disappointed that the numbers missed forecasts whilst others focused on a 45 per cent dividend hike. KCom's valuation is admittedly quite cheap at 9.2 times next year's projected earnings particularly given its 5.4 per cent dividend yield. Yet long-term KCom-watchers hunger for a more ambitious strategy, and with the likes of Redstone providing that sort of clear vision, there may be better times to buy into the stock.

Qinetiq

Qinetiq's interim results gave investors something to cheer about this week. Operating profit was 35 per cent better than in the first half of 2006, slightly ahead of forecasts, and pre-tax profits rose by 9.3 per cent to 25.9m. As a defence contractor, Qinetiq is never going to be far away from controversy, and certainly senior management got a once-in-a-lifetime deal when the company floated. But regardless of that, it is difficult to argue that Qinetiq has failed to deliver on its promises since it came to the market. The stock trades on an undemanding multiple of under 13 times forecast 2009 earnings and, if investors are not bothered by the ethics of the defence industry, Qinetiq looks in good shape to provide decent long-term upside.

Brewin Dolphin

Most people believe, correctly, that brokers make less money in bear markets than in bull markets. So the rocky time Brewin Dolphin's shares have had in the last month should surprise no one. But this week's interim results showed good growth across the business. In investment banking, the pipeline of transactions is holding up this year after last year's record performance. Although no broker is immune to the fluctuations of the market, Brewin Dolphin is holding up well. There may be further to go but for now the market is too risky to recommend buying the shares. However, holders of Brewin Dolphin should enjoy rising dividends and a business managed for the long-term.

Acta

Acta signed its first major development contract this week. Who with? Well, we're not quite sure. The company, which makes platinum-free catalysts for low-cost hydrogen generation, said that the OEM, which is based in Asia, is one of the world's largest corporations and did not want its identity revealed. The total contract value is estimated to be 2.5m over the first 16 months. A big partner may bring big benefits, but it may also deliver big headaches. Acta is the junior partner in this deal and it will have to be careful to safeguard its position. The contract is positive, but we'll only know the full implications once the relationship between Acta and its partner becomes clearer. Although this is good news, we are reluctant to encourage readers to dive in. Hold.

Antofagasta

Antofagasta has grown almost seven-fold in the last five years, and considering most observers, including us, remain bullish on the mining sector, it should continue to provide shareholders with decent returns. However, nothing goes up in a straight line forever, and this week's poor third-quarter figures resulted in a 13 per cent decline in profits to $1.27bn. In ordinary times there is enough bad news in this announcement to recommend a flat out sell. But for mining stocks, particularly those that are feeding the insatiable appetite of Chinese growth, these are not ordinary times. Demand for metals is likely to remain very high, even if there is a more rapid economic slowdown in developed economies. Our advice has been the same for all of the mining stocks. No one ever went bust taking a profit, so holders should think about banking some gains without heading for the exit completely.

JJB Sports

The high street is a tough old place to earn your crust; sports retailing is no different and thanks to the efforts of England's footballers next year looks like being as tough as ever. At least other retailers don't have to rely on a bunch of overpaid egotistical sportsmen to drum up interest in their fare. Despite the company's long-term strategy to reduce dependence on football tournaments, England's failure to make it into next year's European championship will impact growth as replica-shirt sales decline. And then there are more general concerns, about an impending economic slowdown and a decline in consumer spending, which should worry any retailer.

Investors should take their cue from the company remain cautious. There are better places to put your money. Sell.

Telecom Plus

Telecom Plus has belied its position as one of the smaller fish in the telecoms pond with a great set of results, growth that suggests its unique package of fixed-line, broadband, gas and electricity products is finding further favour with customers. Although the customer base has stalled at around 213,000 over the past six months, its existing users are sourcing more products from the company. The company has sufficient headroom to buy back up to 12m worth of shares if it desires and its balance sheet will remain strong even if does so. Even in these uncertain times, a valuation of 10.2 times this year's projected earnings and 9.1 times fiscal 2009 forecasts looks very compelling. Buy.

Inmarsat's new satellite is set to boost a stellar performance

Investing in the satellite sector is traditionally risky. Yet since debuting on the London Stock Exchange in mid-2005, Inmarsat has proved a good bet, with the shares currently trading at double the IPO price on the back of stellar revenue growth over the past two years.

Last week the UK company confirmed that it had signed a deal with the European Space Agency to develop and launch Alphasat, the most advanced satellite for civilian applications.

The satellite will boost Inmarsat's capability and capacity, supporting accelerated revenue growth. However, it will also lead to significant investment some 190m between 2008 and 2013. Capex will be mostly back-ended, as launching the super-satellite is a costly exercise. However, Alphasat will increase the company's spectrum in Europe, the Middle East and Africa by some 30 per cent.

Inmarsat's valuation is certainly rich it trades at over 46 times 2008 forecasts. Although it could be stung by the weak US dollar, as 60 per cent of its cost base is in sterling, with strong growth potential, and the long-awaited in-flight voice and data services picking up in 2008, Inmarsat's valuation looks underpinned by strong revenue growth over the coming decade.

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