Investment Column: Barratt subsides despite sturdy update

Centaur Media; Wilmington

Edited,Nikhil Kumar
Sunday 23 October 2011 03:52

Our view: Hold

Share price: 105.9p (-5.3p)

So far, we have been bearish on Barratt Developments, keeping away not so much because of the company, but because of the sluggish state of the housing market and what that means for sentiment around the stock.

That the mood among investors remains fragile was evidenced by the movement in the Barratt share price after the house builder issued its full-year trading update yesterday.

The company said it was set to return to "profitability before tax and exceptional refinancing costs", and reported some good numbers. Second-half total completions, it said, were in line with the performance last year, and private average selling prices were up by around 5 per cent.

In more good news, net debt stood at around £330m at the end of June, against £366.9m last year. Another highlight was the refinancing package that has been put in place, "providing the group with circa £1bn of committed facilities for 4 years".

So, why did the stock fall back? As some in the City noted, we suspect that at least some of the weakness was down to the outlook, indicated by the statement that "while we have seen greater stability in the second half, trading conditions remain challenging in some areas outside London and the South-east, where activity remains constrained due to the limited availability of mortgage finance."

Which brings us back to sentiment. There is no doubt that Barratt is among the most undervalued stocks in an already undervalued sector. And yes, long term, it has supportive fundamentals. But, as we have said before, unless credit begins flowing and the housing market shows some sustainable signs of life, we do not see how this stock will make any meaningful gains in the near term. We are, therefore, not minded to buy. But the company's positive performance does deserve credit, so we would hold.

Centaur Media

Our view: Buy

Share price: 51p (+5p)

If sightings of centaurs – the mythical half-man, half-horse creatures – are somewhat rare these days, so are those of media companies whose advertising revenues are booking double-digits gains. Yet, that's exactly what Centaur Media was offering yesterday when it put out a pre-close trading statement.

The group, which owns titles including Marketing Week, surprised analysts with news of a strong end to the year, saying profits would be at the top end of internal expectations.

Revenues are expected to grow 14 per cent, as both digital and print advertising revenues rose, the former far outperforming the latter in terms of growth over the second half. The events business is also doing well.

All this comes amid a restructuring of the company into three operating divisions. The rejig will include disposals, and will bring cost savings. Management is also targeting an expansion of margins.

The business, in other words, is on the right track. Moreover, it boasts a valuation of around 11 times forward earnings for next year, according to Altium. That is hardly expensive. In fact, given the positive update, it looks downright cheap.


Our view: Hold

Share price: 114.5p (-2p)

The market value of Wilmington, the professional business training specialist, has tumbled since its shares hit a 12-month high of 184p in January.

This is largely down to fears over the trading environment for its legal training arm, which has been hit by small and medium-sized companies cutting back on courses for conveyancing.

In a profits warning in May, Wilmington also said its print publishing unit had been finding the going tough, though it had continued to beef up its digital revenues. But in a pre-close trading update issued yesterday, the group sprang no new surprises and reassured investors that its performance for the year to 30 June is expected to be in line with hopes.

Wilmington also said the overseas expansion of its banking and finance businesses is "progressing well".

However, we note the company's caution regarding the UK and are not convinced that smaller clients will begin splashing cash on training soon. That said, the forward earnings ratio of 11 times, and the heights scaled by its shares recently, despite the downturn, suggests the lull will be temporary.

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