The Investment Column: De La Rue just goes on printing money and looking good

Intec Telecom Systems; KCom

Our view: Buy

Current price: 850p

It is almost impossible to write anything about De La Rue without mentioning that it is one of the few companies in the world with a licence to print money. Proving that the business is a lucrative as it sounds, the shares have performed superbly over the last four years and if yesterday's interim results and statement are anything to go by there should be scope for more to come. Pre-tax profits for the first half rose by 22 per cent to £53.8m as sales jumped more than 5 per cent to £345m, both marginally ahead of consensus market forecasts. Banknote margins were particularly strong, up to 18.9 per cent, and there appears to be more room for improvement in margins in the second half.

The company is split into two divisions – security, paper and print, which handles high security currency production, and cash systems, which manufactures currency handling equipment. The former brings in just less than 70 per cent of all group earnings.

Perhaps of more interest yesterday was the company's decision to launch a strategic review, to look at De La Rue's balance sheet, dividend policy and corporate structure. Although this is a very early stage, there is a good chance that the company could sell off the cash systems division, gear up the balance sheet and give shareholders significant returns of capital.

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.

The shares are attractively priced on approximately 13 times forecast 2009 earnings. That number is likely to come down as analysts digest yesterday's strong results and the strategic review could result in the company making significant improvement in its normal dividend and paying a special dividend.

De La Rue looks to be in fine fettle. It is a defensive business with good growth prospects and, although the strategic review could fail to deliver on the most bullish expectations, it is good to see a business doing a review when things are going well rather than as a last-ditch effort to generate some value.

Intec Telecom Systems

Our view: Buy

Current price: 35.25p

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.

John Hughes, chairman and acting chief executive of the company, and Robin Taylor, the ex-ITNet finance director, have worked hard to get the struggling billing software developer back on its feet. The recovery work has resulted in EBITDA margins expanding to nearly 12 per cent in the year to the end of September from less than 6 per cent in the year before, with revenue rising eight per cent to £124.5m. Although the company recorded a wider loss due to restructuring and impairment charges, Intec's finances appear to be in better shape than for some time.

Mr Hughes, who is also chairman of data hosting business Telecity which has won many admirers after its successful IPO earlier this year, believes that while the company has lowered costs substantially by cutting jobs, sharpening up its internal processes and systems has also helped improve margins. Meanwhile, Intec has rediscovered the benefits of organic growth over the past few months after spending years growing the top-line through acquisition.

As a result, Intec expects to hit market expectations for revenue growth to around £132m next year despite disposing of businesses that were factored into those estimates.

The company is set to win a major contract in its Latin American business after being named preferred bidder and with a new chief executive set to takeover the company any day now, the time looks ripe to take a punt on the shares. 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

Our view: Sell

Current price: 53.5p

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. Yesterday's interim results split opinion with some watchers disappointed that the numbers missed forecasts whilst others focused on a 45 per cent dividend hike that underlined the board's confidence in future growth.

KCom appears to be trying to distance itself from its roots as Hull's monopoly telecoms provider after folding its cash-generative legacy business into its overall telecoms division. Whilst the traditional business provides a decent spine for KCom's expansion into high-growth managed services, the decision to bury it in another division has raised speculation that the Humberside company may fancy snapping up a few of its rivals to forge ahead with its transformation.

However, the compan – which has, in fairness, snapped a few minor rivals over the past year – looks happy to remain something of a niche player in a very fragmented industry rather than using its cash to rival BT's ambitions in the SME market. Caution is, of course, a great watchword and 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.