Wait for a more promising outlook before investing in Bodycote

Hammerson not worth moving in to; Avoid Spirent while uncertainty remains

Bodycote International was quite a big company a few years back. The company's metal bashing skills such as "hot isostatic pressing" a gas treatment process which strengthens metal, had given it valuable market niches supplying parts to manufacturing industry. But times have changed and Bodycote has itself been bashed about quite a bit. Manufacturers have cut back on orders and demand in virtually all Bodycote's markets has tumbled. The shares have plunged and there were fears of a profits warning a few months back.

The pain was evident in yesterday's half-year results which showed that pre-exceptional profits for the first half were down from £41m to £21m. However, the results were not as bad as some analysts had feared, prompting an 8 per cent bounce in the share price.

The good news is that the company is under new management and being subjected to a rigorous restructuring. The bad news is that the market will not give the stock a decent rating until a manufacturing recovery looks likely.

Under John Hubbard, who replaced John Chesworth at the start of the year, Bodycote has closed nine plants with nine more to go. This has involved 450 redundancies so far with another 250 still to come. Just over £10m of the £18m of exceptional charges have been taken in the first half with the balance to come in the second. About £10m of annual cost savings should be achieved as a result.

The management structure has been reorganised and key performance indicators introduced to make it easier for the company to compare itself with its peers. There is also a move to increase its outsourcing business where it undertakes metals treatments for companies which have previously done the work themselves.

These improvements will be needed as insurance costs rise and pricing power remains weak. The most worrying signal from the company yesterday was that its customers are no longer expecting a recovery later this year. They are now pinning their hopes on the first half of 2003 instead.

The balance sheet is just about OK with debts of £240m and gearing of 60 per cent. And the maintained dividend should give some confidence going forward.

Assuming profits of £47m for the full year the shares trade on a price-earnings ratio of 10. That is cheap for a business that is now much more focused on generating returns for shareholders rather than just building sales. But it is not worth buying until the outlook is more promising.

Hammerson not worth moving in to

The property market is a strange beast these days. While direct investment in commercial property, by rich individuals and institutions, is strong, demand for occupancy is weakening.

Direct investment is boosted by very low interest rates, which have encouraged borrowing to buy real estate, and also the general disillusionment with equity investment, which has led people to seek refuge in bricks and mortar. But demand for office space has been hit by the business downturn.

Hammerson, one of our biggest property companies, underlined this apparent disconnect yesterday, with its figures for the six months to 30 June. The value of its central London properties fell 2.3 per cent, though shopping centres rose 2.9 per cent.

Overall the group saw the net asset value of its portfolio edge up 1.6 per cent to 743p per share, below City forecasts. Along with the company's bearish outlook statement, Hammerson shares took a pounding and fell 8 per cent to 508.5p.

London office rental rates have "softened" by between 5 and 10 per cent and Paris offices are also off some 5 per cent. The company said it would take 15 to 18 months for rental growth to return to the office market.

The company is unique among the large property groups in having assets on the Continent. John Richards, the chief executive, reckons the much tighter supply situation in France means that Paris offices will recover long before London rebounds.

This offers some upside as does the fact that Hammerson shares trade at a chunky discount to NAV. But the shares have already performed strongly this year. And with the company itself seeing no quick recovery it is not worth buying.

Avoid Spirent while uncertainty remains

Spirent, which sells equipment for the testing of telecoms networks, has been hit hard by the downturn in the telecoms sector which has forced its customers to slash their spending budgets.

So while the company took early steps to cut costs, and while yesterday's figures were ahead of most analysts' forecasts, the numbers still did not make pleasant reading.

Pre-tax profits, before goodwill and exceptionals, plunged to £31.4m in the six months to 30 June from £73.6m in the same period a year ago. Sales fell 32 per cent to £311m from £458.9m.

The core communications division was the hardest hit with sales falling to £179.8m from £255.2m. Network products held up reasonably well with sales of £84.7m, compared with £91.2m.

No wonder the company was urging investors to compare the figures with the previous six-month period, or the second half of last year. On that basis, group profits were up 15 per cent on sales down 9 per cent. Better still, sales at the communications division were 3 per cent better while sales at network products were 7 per cent better.

While, on a sequential basis, things might be looking brighter, investors should sit up and listen to Spirent's warning: the telecoms market is showing no signs of improvement and the market remains unpredictable.

Telecoms companies worldwide continue to keep an extremely tight rein on spending and the Canadian telecoms equipment maker Nortel Networks underlined the problem with a profit warning late on Tuesday night.

Against that backdrop, analysts are rightly concerned that Spirent could come under more pressure this year and that current profit forecasts could prove to be too high.

Others point out that Spirent remains heavily exposed to any weakening of the dollar while some suggest a dividend cut might be on the cards.

Spirent is forecast to make profits of about £65m to £70m this year, translating to earnings of about 5p a share. That puts the shares, which rose 3.25p to 71p, on a forward multiple of 14 times. Given the ongoing uncertainty, there is no need to buy.