The Investment Column: Southern Cross Healthcare is under the weather

Smurfit Kappa; Amino Technologies

Alistair Dawber@AlistairDawber
Saturday 22 October 2011 23:48

Our view: Sell

Share price: 129.5p (+5.5p)

With the economy seemingly rolling headlong towards recession, Southern Cross Healthcare should be a nailed-on, first-class, dead-cert buy. Relying as it does on local authorities placing an ever-ageing population in its care homes, the group should be one of the most defensive picks you can find.

In fact, Southern Cross has had a woeful few months that included a profits warning at the end of June, two months after saying it was as fit as a fiddle. The group, a former private equity-owned company, operates an opco model – selling off its care homes before renting them back and thus owning no assets. It is also highly geared: a one per cent fall in occupancy rates results in a £10m loss of earnings before interest, taxes, depreciation and amortisation (Ebitda).

The stock fell by 58.5 per cent after the June profits warning, with some analysts saying the announcement was an indictment of management. The shares have not recovered significantly since (they were up 4.4 per cent yesterday), even with yesterday's trading update, which stated that its 14-week adjusted Ebitda was up by eight per cent. However, there is certainly a case for buying into the group. Analysts at Investec reckon that even though they did not expect the statement to lead to a spike in the stock, investors should buy now and wait for the 61 per cent of "potential upside" in the stock, which will rise to 200p, they say. "We remain of the view that the financing is renegotiable and that trading issues will begin to nominalise, with today's [statement] providing encouragement on both these fronts. We do not feel this is currently reflected in the shares which are currently trading on 4.7 times our CY09 expectation."

This is fine, but there was nothing substantial for investors to get excited about. On selling properties that Southern Cross is stuck with in an ever-falling market, Investec says there are "several potential purchasers". On renegotiating debt terms with banks after breaching covenants, it adss that lenders are being "very supportive". There may well be lots of potential but investors should wait for something more solid. Sell.

Smurfit Kappa

Our view: Sell

Share price: €4.99 (+47c)

Box-making is not the sexiest industry, and Irish manufacturer Smurfit Kappa has hardly been the sexiest of stock tips either, having fallen 73 per cent in 12 months. It issued its half-year numbers yesterday, which to a casual observer may not have sounded too hot either. Smurfit blamed tough trading conditions for a one per cent fall in second-quarter profits. However, such is the state of the market, with input costs up and demand slackening, the figures were actually pretty impressive and beat most analysts' expectations. The stock closed up 10.4 per cent.

It was one of the few bits of good news Smurfit has had since its shares began trading again in March 2007 after being sold by private equity owners at nearly €16 apiece. The stock has to stop falling at some point and as Europe's biggest box-maker, Smurfit arguably has the scale to make quick progress when the market improves. Moreover, the shares are pretty cheap, trading on at 3.7 times the group's forward price earnings ratio against the rest of the sector, which those close to the company claim is on about 12 times.

All that should mean that the company is a screaming buy. However, it is tough to back a loss-maker, particularly when the group's management, in this case chief executive Gary McGann, says things will remain tough for the foreseeable future. Yes, the decline of the shares may slow, but investors are not going to make vast returns from Smurfit Kappa. If they want exposure to the packaging sector, and there is no reason why they should, buy Smurfit Kappa, but if they would prefer into more a more stable company and protect themselves from the worst of the economic slowdown, avoid this group. Sell.

Amino Technologies

Our view: Buy

Share price: 53.75p (+1.25p)

Apparently, 75 per cent of internet users now download online video content. Whether that is re-runs of the Olympics opening ceremony, or something a lot less wholesome, internet users are demanding a better service and often want to use their televisions to view what they watch.

That is where Amino Technologies comes in. The company, which announced interim results yesterday, develops broadband systems that, among other things, allow people to watch on-demand video on standard television sets. The group announced a return to the black with pre-tax profits of £1.09m, a marked improvement on the loss of £400,000 announced this time last year. Amino's shares rose by 2.4 per cent after the results, and news that the group's management expects the next six months to continue in the same way. Amino's chief executive, Andrew Burke, said the transition from MPEG-2 to MPEG-4 technology, which will enable much better quality viewing and take up less bandwidth, would be a significant step for the group.

In terms of valuation, analysts at house broker KBC Peel Hunt reckon there is money to be made. They make the point that Amino's net asset value is equivalent to its market capitalisation, which rather ignores the profits posted yesterday. "In the light of this, we would expect the company to continue its programme of share buybacks," they said in a note. If nothing else, that should underpin growth in Amino's stock. Buy.

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