The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment Newsletter

By Alan Watson - A Shareworld Contributor

Please Login here.

August 2011 - Issue 12

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:BARRATT DEVELOPMENTS
3. Share of the Moment:NATIONAL GRID
4. Sniffing Around 1:GB Group
5. Sniffing Around 2:Stadium
6. New Entrants 1:Hogg Robinson Group
7. New Entrants 2:Senior
8. Straight from the Kennel:Iomart Group

Market Comment & Strategy

August so far has been a difficult month, but we think that the bottom may have been reached. Between August 1st and August 10th the FTSE 100 index fell 14% from 5815.19 (its opening level on the 1st) to 5007.16 at the close on the 10th.

Investors were driven by fears of slowdown in the US economy as well a worries over European debt. The US saw its international credit rating was lowered and there are rumours that France could be in line for similar treatment.

In the subsequent fall in stockmarkets every sector was down, unless you regard Gold as a sector, with smaller companies and mining stocks particularly badly hit.

So, what happens now? After having sustained heavy falls most sectors are beginning to look good value. What is unsure is the extent of the damage suffered by companies in the fall. It is, however, likely that the most damage has been done to investor confidence. This effect could be short lived - indeed, at this moment investors are searching the Market for bargains created by the fall in share prices. As far as we can see, relatively few companies are experiencing profit falls or intend to cut dividends because of the fall in share prices. We think a buying opportunity has been created.

Eavesdropper

Share of the Month

Comment on BARRATT DEVELOPMENTS

The company, which is involved in house building and commercial development, is a well-known name in UK construction. We believe that, despite the current dire state of the housing market thanks to the lack of mortgages, Barratt Developments looks good value.

The company issued a trading update on 14/7/11 which confirmed that completions in the second half were in line with same period of 2010. There was an increase in average selling price of around 5% in the second half to £204,000 compared with £395,000 previously, as a result of changes in mix. Profitability rose from 5.9% to around 7.8%. Some areas remain difficult but overall the results are relatively encouraging. The company has been buying land and sites cheaply during the downturn so, should house prices remain stable or, indeed, start to rise, profits could increase. Helped by Joint Equity and Partnership deals with buyers, demand has held up somewhat better than expected and Barratt's performance has benefited accordingly. However, a large percentage of would-be first buyers are still unable to raise deposits.

First half operating profits improved significantly, with margins rising from 2.4% to 5%. The results for the six months to 31/12/10 showed that revenues were £875m, similar to those in the same period of 2009. Completions were down 4% to 4,832 units but, with an average selling price of £170,000, up 6% on the previous year. Some 24% of sales were in social housing with private sales averaging £192,000, up 11%. The Market is forecasting pre-tax profits of £21.6m for the year to 30/6/11, which implies that the shares are currently trading on a PER of 61.7. They expect a small dividend to be paid. The results are due on 14/ 9/11.

Looking to the year ending 30/6/12 analysts anticipate pre-tax profits of around £80m which, if achieved, would reduce the PER to around 17. We regard the shares are an interesting recovery play, Buy.

Price 78.3p; Sector: Household Goods and Home Construction; Market Cap: £755.9m;EPIC BDV Next Results: Interims February Full Quote.

Share of the Moment

NATIONAL GRID

NG is a high-yielding blue chip and is the type of company which remains a buy even in current market conditions. The company runs gas and electricity networks in the UK and has similar activities in the US which provide power to NY City and New England. These activities have considerable stability, allowing the group to pursue a progressive dividend policy.

In 2010 NG unexpectedly made a 2 for 5 rights issue which raised £3.2bn which tended to put-off investors. However, the cash has been directed towards funding improvements in the group's gas and electricity systems over an 8 year period which looks a good move in current difficult conditions.

For investors the key point is that the group remains set to pay generous dividends. In the year to March 2011 it paid a full year dividend of 34.6p per share. This is expected to be increased to 39.3p per share, prospective yield of 6.9%.

Forecasting profits is currently somewhat difficult. Beyond currently volatile market conditions, commentators are forecasting further periods of recession. This remains to be seen and we believe that NG could produce pre-tax profits for the current financial year ending 31/3/12 could emerge at around £54m, putting the shares on a prospective PER of around 11. We think that profits for 2011/2013 may not be that bad.

However, the dividend is the main story and the shares should be bought on that basis.

Price 567.5p; Sector:Gas, Water and & Multiutilities; Market Cap: £19,983m; EPIC NG.; Next Results: Interims 17 Nov Full Quote

Sniffing Around 1

GB Group

The group's activities are predicated on the idea that the most successful organisations recognise the value of understanding customers' individual identity - who they are, what they need and what they like. This is identity management. The group operates in four complementary identity management areas: Identity Verification, Customer Registration, Marketing Services and Tracing Services, which enables clients to make informed business decisions based on a knowledge of consumer identity and behaviour. This leads to more effective communication and interaction with the customer.

The results for the year to 31/6/11 were good, the group making progress towards achieving its strategic objectives. Ahead of expectations pre-tax profits increased by 46% from £1.3m in 2010 to £1.9m on revenues 10% higher at £24.4m. This was helped by a good performance from Identity Verification which increased its profits fivefold from £0.1m to £0.5m. Elsewhere, Identity Based Marketing Services increased its profits by 11% to £1.7m. Cash generation was good overall with cash and cash equivalents rising from £5.7m to £6.2m, after paying out £1m in dividends during the year.

We think that the year to 30/6/12 could be set for further steady growth. We anticipate pre-tax of around £2.5m , which would put the shares on a PER of 16 and a yield of 3%. Further growth is likely in 2013. We have pencilled-in pre-tax profits of £3.1m which would bring the forward PER down to 13.2. The shares as a Strong Buy.

Price 44.8p; Sector: Software and Computer Services; Market Cap: £38.7m; EPIC GBG Next Results: Interims - November Full Quote

Sniffing Around 2

Stadium

The company was founded in 1911 and was originally involved in car parts. Currently it offers high quality electronic manufacturing services from its major sites in Hartlepool, UK and South East China. It provides comprehensive design and build to world wide customers for original equipment manufacture (OEM) products and electronic sub assemblies at globally competitive prices. The group has invested strongly in Asia which has enabled it to compete successfully in price-sensitive global markets. It has a first class international customer base. Many of its customers are household names.

Stadium has a broad spread of electronic products with the industrial and automotive, medical devices, security, green energy and safety items showing the greatest growth. The group has two factories in the UK and a large plant in China. The UK focuses more on bespoke products while the Chinese operation turns out higher volumes of more standardised goods.

In the year to 31/12/10 Stadium lifted its pre-tax profits by 95% from £1.47m to £2.9m. Earnings per share were 6.8p and the annual dividend was lifted 11% to 2.15p. The new Chairman expects turnover to more than double over the next 3 to 5 years to £100m.

The shares look cheap at current levels. Stadium is an international operation with a diversified range of electronic products. With a new Chairman just installed and a new Chief executive due to join the group, Stadium looks set to move ahead. Pre-tax profits in the current year, which ends 31/12/11, are forecast to rise to at least £3.1m with earnings per share emerging at around 8.3p, a prospective PER of 8.7. The consensus is that, in 2012, pre-tax profits could be set to reach £4m, a forward PER of around 7.5. We think that these forecasts could prove to be on the low side. Buy.

Price 64.5p; Sector:Software and Computer Services; Market Cap: £17.0m; EPIC SDM; Next Results: Interims September AIM Quoted

New Entrants 1

Hogg Robinson Group

The group provides corporate travel and transaction management service. Its business model differs substantially from that of the traditional travel agent, in that it has no inventory to sell and has no forward bookings of hotel rooms. Moreover, it is not exposed to rising fuel costs. It deals with customers directly, arranging and organising individual travel, which his is not as easy as it sounds as the group's responsibility to the customer extends over the entire trip.

The main business asset is HRG's technology platform which has been purpose-built to deal with modern travel policies. It is flexible , scalable, and compatible with third -party suppliers and clients' systems. It is a market leader. HRG is an extremely client focused operation and is able to provide high levels of service from a relatively small asset base, thanks to this technology. The Group's business model is generally fee-based as opposed to commission based, which currently accounts for less than 20% of Group revenues. HRG typically works on the basis of 3 to 5 year contracts with clients.

The results for the year ending 31/3/11 were better than expected . Revenues rose by 9.5% to £356m and pre-tax profits rose from £26.4m to £39.2m as margins, reflecting aggressive cost management, improved from 10.8% to 11.7%. The annual dividend was lifted by 25% from 1.2p to 1.5p. Pre-tax profits could advance in the current year to around £35.5m - a prospective PER 8.7 and a yield of 2.4 if the annual dividend is increased to 1.6p. We anticipate further progress in the year to 31/3/13.

After a meeting with the management we think that the shares represent a relatively low risk play on business travel recovery. Airlines are currently showing an increase in the demand from the commercial sector, a reminder that business travel expenditure is insulated from conditions in consumer spending. Moreover, the successful purpose-built business model requires a smaller asset base and has no exposure to fuel price rises. HRG's management has also shown flexibility and resilience in the current downturn. Consider the shares as a strong buy.

Price 59.3p; Sector:Support Services; Market Cap: £182.9m; EPIC HRG; Next Results: Interims - September Full Quote (We met with the management on 7/6/11)

New Entrants 2

Senior

Senior performed strongly in the first half of 2011. Profit before tax increased by 17% to £38.0m, reflecting improved product mix and operations. These also resulted in record operating margins of 13.6% and improved cash generation. Good results mean that Senior has the flexibility to invest in organic growth and acquisitions. Economic concerns remain, but the general outlook is reasonably encouraging , hence the 15% increase in the interim dividend to 1.15p.

The Group continues to gain market share in a number of its markets, through improved operational performance and financial strength. The commercial aerospace industry is anticipated to be strong for a number of years with Boeing and Airbus increasing build rates and the Boeing 787 due to start delivery to customers in the third quarter 2011. Elsewhere across the Group, the outlook is generally positive with the regional and business jet manufacturers forecasting improvement from current low levels, Senior's main military business is expected to remain relatively good and the North American truck market are showing some signs of recovery. Overall, the Group's industrial businesses are well positioned to benefit from growth in their end markets when this occurs. The outlook for Senior remains encouraging for the remainder of the year and over the longer term. Strong buy

Price 151.3p; Sector: Aerospace & Defence; Market Cap: £606.6m; EPIC SNR; Next Results: Finals - March 2012 Full Quote

EAVESDROPPER
Straight from the Kennel

Iomart Group

My head's been in the Cloud for the last couple of weeks. I've been so absorbed that I've been walking into lamp posts and tripping over kerbs. I'm talking, of course, about Cloud Computing. So what is it? Cloud provides access to software, data access and storage services to users. To quote Wikipedia - yes I looked it up - “the concept of cloud computing fills a perpetual need of IT: a way to increase capacity or add capabilities without investing in new infrastructure, training new personnel, or licensing new software. Cloud computing encompasses any subscription-based or pay-per-use service that, in real time over the Internet, extends IT's existing capabilities.'

I've just discovered Iomart Group The Group's principal activity is providing web based managed hosting services for both the consumer and business. Originally founded in 1998 as an integrated internet and telecommunications company, the Group has evolved to become one of Europe's largest providers of managed hosting, colocation, data centre, and business continuity services, serving over 300,000 customers each day. Having been at the forefront of the UK's technological revolution for the past decade the Group has developed an enviable reputation for its internet expertise, its service ethic and its product innovation. It is also involved in Cloud Computing and could be set to increase its earnings substantially over the next few years. The results for the full year ending 31/3/11 were good. Pre-tax profits rose from £0.4m to £2.8m, an increase of 618%. Earnings per share rose 137% from 1.23p to 2.91p.

The market consensus is that pre-tax profits could rise to £5.2m in the current year, with earnings per emerging at around 5p - a prospective PER of 18. Further progress is anticipated in the year ending 31 March 2013, with pre-tax profits rising to perhaps £7.8m, implying a forward PER of around 13.

I think that Iomart is a very interesting company. and believe that the profit forecasts could prove to be on the conservative side as Cloud Computing market expands. The interim results are due to be announced 29/11/11. It's time to buy the shares.

Price 99.8p; Sector: Software and Computer Services; Market Cap: £103.6m; EPIC IOM; Next Results: Interims 29 November (We met with the management on 18/6/11) AIM Quoted

To read the rest of the Eavesdroppers Dogged Investment Newsletter, become a Premium Member - We are currently offering a 30 day NO OBLIGATION Free trial, Sign up here.

If you already have a basic Shareworld membership, click here to become a premium subscriber.