Investment Column: Back Cenkos to wade through the treacle

David Prosser
Tuesday 05 July 2011 00:00


Our view: Buy

Share price: 88p (-8p)

Life is not easy for the brokers who make their living looking after the smaller and medium-sized companies that bulge bracket investment banks largely turn their noses up at.

The market for flotations and M&A work has certainly improved from the dark days of the credit crunch, but the good times are a long way from being back. That is reflected in the way shares in Cenkos Securities have performed – and to add to those woes, yesterday chief executive Simon Melling announced he was stepping down.

Mr Melling wants to take a break, though he will run the business until a successor is found and is dismissive of talk of boardroom ructions. But he warns that, while the third quarter has only just started, trading can already be described as "treacly".

Still, Cenkos is fortunate in that it has a flexible cost base. It has resisted pressure to raise basic salaries along the lines of larger rivals. The pay of Cenkos staff is therefore closely matched to the company's performance. If it does well, they get a bonus. But there are none of the guarantees that caused so many problems among the big boys and this is not a company that presents "systemic risk" to the markets. For investors, that's no bad thing.

Still, though Mr Melling remains confident Cenkos can trade profitably throughout the remainder of the year, the shares remain a risky play. The small and mid-cap companies which Cenkos looks after are far more dependent on the performance of the stuttering UK economy than larger rivals, though Cenkos has worked to cushion that by developing business overseas, bringing a number of Asian companies to the UK market.

These shares are starting to look cheap at about eight times forecast full-year earnings. The dividend was cut last year, but should be raised if earnings improve, although yield is not something to count on. Mr Melling's impending departure, combined with the shaky economic climate, means the business faces significant uncertainties. But there is a buying opportunity here for those willing to roll the dice.


Our view: buy

Share price: 1,032 (-8p)

It is hard to avoid puns when taking a look at Genus, but the animal genetics company has been in rather a bullish mood recently. When it updated the market back in May, the Basingstoke-based group – which supplies both breeding pigs and high-quality bull semen to farmers – said it was on track to beat the previous 12 months, and yesterday's brief pre-close trading statement ahead of September's full-year results confirmed that view.

The company believes it will meet market expectations, with analysts predicting a £38m pre-tax profit. This is despite its customers having been hit by the rising cost of feed, with Genus saying farmers have managed to make up for this with increased output prices. For years the company's star asset has been a bull called Picston Shottle, but the Holstein Friesian is approaching retirement, as is Genus' chief executive, Richard Wood.

Announced in May, after 14 years at the helm – during which time he oversaw the floating of the company and its promotion to the FTSE 250 – Mr Wood is saying farewell in September.

For his replacement – Karim Bitar, the European head of the US drug maker Eli Lilly – the task will be to steer Genus' continued growth, set to be driven through expanding its presence in emerging markets as well as further technological innovations, with it hopeful on the ongoing development of a way to more efficiently separate male and female sperm.

Yesterday, the shares dipped 8p to 1,032p, but after gains of 20 per cent in 2011 – and more than 100 per cent over the last two years – we suspect some profit taking. The support behind the stock remains. Buy.

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