Investment Column: It's time to bank profits in Homeserve

Prezzo; IQE

Nikhil Kumar
Thursday 08 September 2011 00:00

Our view: Sell

Share price: 475p (+12.4p)

Homeserve's shares were on the move yesterday, as the company outlined plans for expansion in the US. It also unveiled a deal with a water-heater maker to help with manufacturer warranties, a potentially lucrative and high-margin business.

The group, which offers insurance against a range of household misfortunes and sorts out repairs when they happen, has already proved that it is one of those rare British businesses that has been able to replicate its success on the other side of the pond.

So it is no wonder that investors were so excited about yesterday's announcements, which were accompanied with a reassuring aside that profit forecasts should be met.

You could argue that now isn't the best time to bolster its US presence, given the state of US politics and the economy there. On the other hand, it remains the case that companies that are willing, and able, to act during difficult times tend to emerge far stronger and are better placed to capitalise when things improve.

And the US offers potentially huge opportunities for Homeserve if its growth resembles the way its UK business has gone. All the same, we would highlight some concern about that Which? report, which did not reflect at all well on the way the company uses sub-contractors (nor did the mealy- mouthed statement that was issued in response). This sort of reputational damage can feed through to a company's bottom line.

More pertinent for the current investment case, however, is the value. In May 2010, we said hold at 1910p. That was a follow-up on our decision to hold at 1542p in September 2009.

Since then the company has undertaken a share split (five for one) and the stock has continued to climb. However, the valuation is now starting to look full at 17 times this year's forecast earnings, (15 times next year's).

Given the company's growth profile it arguably deserves a premium rating. But it's still starting to look stretched and we think the share price could easily pause for breath. So use yesterday's gains as an opportunity to take profits.


Our view: Hold

Share price: 61p (+3.5p)

Prezzo, the Italian restaurant chain, continues to defy the economic gloom. Yesterday, it posted a surge in profits as it pushes ahead with its expansion programme.

The group behind 172 restaurants – comprising largely the eponymous chain, as well as 12 Chimichanga and a handful of Caffè Uno outlets – grew pre-tax profits by 17 per cent to £7.3m over the half-year to 3 July. The group's revenues jumped by 23 per cent to £59.6m, boosted by five new restaurants.

Indeed, Prezzo will accelerate its opening programme in the second half to bring its total to 20 new outlets this financial year, including its acquisition of a six further sites from Caffè Uno.

That said, the group again passed on a dividend. Furthermore, investors looking for capital growth may find more racier shares elsewhere, as its shares have only deviated between 55.8p and 62.6p over the last 12 months. While Prezzo is a safe bet for the long term, we think a forward earnings multiple of 10.6 makes its shares fairly valued.


Our view: Buy

Share price: 28.5p (-3.5p)

IQE is in something of a sweet spot. The company supplies materials for semiconductors, with smartphones a key market. It is thus well placed to draw steam from the growing prevalence of these gadgets. The business also benefits from the uptake of other mobile-computing devices.

IQE provided proof of its gearing to this lucrative and fast-growing segment when it issued half-yearly results yesterday. Revenues in the six months to June were up 16 per cent, while pre-tax profits jumped 28 per cent.

Although the company was prudent in acknowledging the darkening economic backdrop and the impact this might have on inventories down the road, or indeed on customers, it did qualify that by saying that it had "not seen any evidence of this at this time".

This is not surprising, given the news coming out of the market smartphone and mobile-computing devices. IQE is plugged into what still looks like a strong market that is only set to grow stronger in coming years.

Moreover, the stock looks affordable, trading at around 17 times forward earnings for this year, falling to under 15 times on the estimates for next year. Given the growth prospects, we think that it is worth a punt.

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