Investment Column: Ashmore emerges from the maelstrom

Dunelm Group; Hargreaves Services

Alistair Dawber
Wednesday 16 September 2009 00:00

Our view: Hold for now

Share price: 225.8p (-5.7p)

As part of the rather unloved fund management sector, Ashmore has suffered huge share price swings in the past two years. Yet it believes the new weight of emerging market economies on the global stage will see the good times roll in the near future.

The company specialises in investments in emerging market debt, as well as special situations. It experienced strong growth before the credit crunch, with its shares peaking at 316.25p in April last year. It had assets under management of $37.5bn (£22.8bn) at the time of its full-year results in September 2008. Then came Lehman, RBS et al and clients began to pull money out, sending the group's shares down as low as 100.75p in January.

Ashmore released full-year results yesterday which showed assets under management were down to $24.9bn (a little higher than the $23.5bn in March) and pre-tax profits had fallen by almost a fifth. Yet analysts said the numbers were better than expected and its chief executive, Mark Coombs, called them "broadly satisfactory".

When last year's results were published, the finance director, Graeme Dell, tried to halt the stampede of investors withdrawing funds by pointing to the long-term attractiveness of emerging assets. It looks as if they may be finally listening. While Ashmore suffered net outflows for the year, assets under management picked up in the final quarter and are still rising.

The group is bullish. "The reshaping of the emerging markets role within the global order has received a significant boost in the last year," said Mr Coombs, who believes Ashmore is in prime position to benefit. It looks an intriguing prospect for the sector, but valued at 16.3 times, according to Canaccord Adams, it trades ahead of its peers which are just under 15 times. Hold for now, but Ashmore certainly could prove fruitful in the future.

Dunelm Group

Our view: Buy

Share price: 310p (+31p)

It has been a torrid year for the homewares market, with retailers including Woolworths, The Pier and Roseby's all collapsing into administration. But the extra capacity injected into the sector has helped one of its most resilient performers – Dunelm.

Yesterday, the out-of-town retailer said its pre-tax profits rose by 6.8 per cent to £52.5m over the 52 weeks to the end of June, in line with City forecasts. Its gross margins – the difference between the price at which it buys stock and the price it is sold for – rose by 120 basis points to 45.8 per cent, helped by more "special buys" such as pillows, towels and linen in its product mix and a swift clearance of stock over the summer. For investors, the 9.1 per cent dividend increase is mouth-watering.

Further good news came from soaring underlying sales, which were up 16 per cent in the 10 weeks to 12 September, as recent wet weather boosted footfall in its stores, although Dunelm warned that this growth rate was "not sustainable". In a sign of its growing confidence, Dunelm is to accelerate its stores opening programme to about 12 this current financial year.

Certainly, the City seems convinced by Dunelm's growth story and "buy" recommendations on its shares abound. But Dunelm's management remained cautious about the outlook and said there was a "lack of visibility" about the second half of its financial year, clouded by factors including VAT going back to 17.5 per cent in January and potential cuts in Government spending. Dunelm also trades on a forecast 2010 price-earnings ratio of 16.4, which is a 17 per cent premium to the sector.

But given the more upbeat mood from the homewares sector for most of this summer, Dunelm will be at the vanguard of any sustained recovery that materialises. Buy.

Hargreaves Services

Our view: Buy

Share price: 643p (+17p)

Hargreaves, the coal and energy services group, may not be sexy – as chief executive Gordon Banham is happy to admit – but it has consistently outperformed its rivals. Its latest preliminary results continued the trend yesterday. Pre-tax profits were up by 47 per cent, revenues up 24 per cent and the full-year dividend up 15 per cent.

Mr Banham said Hargreaves was in the market to expand as valuations elsewhere dropped to more reasonable levels. Analysts shared the positive mood, not least because Hargreaves's assets give it a key role in the UK's looming energy gap. "We see excellent long-term drivers for this business, notably the growing need for energy services, intensified by structural issues in relation to UK energy generation," Altium Securities said.

With shares currently trading at 8.4 times earnings, and yield at 1.8 per cent and rising, Hargreaves is a buy.

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