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Too many shocks for investors to handle

Buy, sell or hold: today’s best share tips
 
 

PREMIER FARNELL
Margin 35.2%, down 2.2 basis points

How to explain the mess that is Premier Farnell? This is a company much covered by this column because as a distributor of electronic components to designers and manufacturers it is a good indicator of global economic trends. It is also vulnerable to small variations in revenues and margins.

Most of the company’s woes, though, seem to come from its own actions rather than from those small variations. Revenues were up across the group, except at Akron Brass, the manufacturer that is being sold. Margins were off by 2.2 basis points to 35.2 per cent because of currency movements, the need to cut prices and the wrong mix of products.

The last was a particular problem in the United States. In the UK, two American competitors became more aggressive. All this left operating profits 11.6 per cent lower at £38.1 million.

The management’s actions, the sale of Akron and the dividend cut from 4.4p to 2.6p seem to have been well signalled to the market. The cut looks inevitable. The sale of Akron will probably take £100 million off debt of £235 million, but the loss of profits from that source would mean that dividends maintained at their earlier level would, at some stage, be uncovered by earnings.

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The dividend yield, above 6 per cent earlier in the year, was about all that was holding the shares up. Their fall of 21¼p to 112p also reflects yet another profit warning, an admission that those difficult trading conditions in the first half had continued into the second — because of the quick turnround on orders, companies such as Premier have good visibility of current trading.

There was also some disappointment that the promised review of the business, announced at the time of the last warning in July that was followed by the departure of Laurence Bain, the chief executive, will not now arrive until December.

At that time Premier moved back expectations for operating profits from £86.5 million to £82 million. These are now being scaled back even further, to between £73 million and £77 million. The shares, on ten times earnings and with the support of a 5 per cent yield, might look cheap and have surely bottomed out.

Gamblers might consider getting in at this level; I would wait for more news.

MY ADVICE Avoid for now
WHY Shares may well have bottomed out but are a highly speculative punt. Given the string of upsets, this is for confirmed optimists only

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KIER GROUP
Revenue £3.4bn Dividends 55.2p

The market got itself into a bit of a pickle over the first set of figures from Kier after the June completion of the purchase of Mouchel, which required a hefty five-for-seven rights issue. The headline dividend came down from 57.6p to 55.2p, which some took as a cut. In fact, the payment is on the greatly enlarged share capital, and the actual amount paid out in dividends was up by 20 per cent.

Still, the shares were marked down by 68p to £14.08p. Perverse, as it would hardly make sense to maintain the payment at the earlier level, so paying back to shareholders money they had already laid out. The shares, on any reasonable projection, still offer a forward yield of 4.6 per cent.

Mouchel had virtually no impact on the numbers, though the buying in of its order book contributed £2.7 billion of a £3.1 billion increase in the total to £9.3 billion. Profits were up across all Kier’s four divisions, and at the pre-tax level they rose 17 per cent to £85.9 million.

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The property division will require increased investment, but that looks manageable, and strong cashflow meant that debt, a source of concern in the past, came in lower than expected at £141 million. Mouchel will fit into Kier’s services division, adding highways work to its existing local authority roads business.

Much of the growth will come from that roads programme and the £700 million work won from the water industry. Kier plans to raise profits by 10 per cent a year until 2020, achievable given the above. The shares sell on 13 times earnings and look a good long-term prospect.

MY ADVICE Buy long term
WHY Fall looks overdone, and future growth is built in

PHOENIX GROUP
Latest value for Guardian £2.7bn

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As ever in these cases, there is no guarantee that Phoenix Group will end up paying upwards of £1 billion for Guardian Financial Services from Cinven. That need not overly concern investors, though.

Phoenix has made it clear that it is in search of further acquisitions; indeed, that is what it does as a consolidator of closed insurance funds — those not taking on new business. Such purchases make sense because of the cost savings from merging their administration.

If the deal takes place, it would be at the top end of expectations, given its market capitalisation of nearly £2 billion, and will depend on what discount to Guardian’s last reported value of £2.7 billion Cinven is prepared to accept. The company received an investment grade rating with Fitch last month, so a deal looks achievable.

The two are not even in exclusive talks, though, and other potential buyers could come in, with Swiss Re mentioned as one. Meanwhile, Phoenix has made it clear there are other potential purchases out there. From an investors’ perspective, the shares, up 4p at 865p, offer a pretty well guaranteed yield of 6.3 per cent, a good enough reason to hold them.

MY ADVICE Hold for income
WHY Yield is good, no matter what happens with Guardian

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And finally . . .

It will be interesting to see what the effect of the market turmoil in recent weeks has on the fund managers when they finally report for the period. Brooks Macdonald reckons that the first quarter from the end of June has been strong enough. For the previous year, the AIM-quoted wealth manager added new funds of £645 million, or substantially more than the total under management at the time of the flotation ten years ago. The company has been spending heavily on IT and other infrastructure to cope with further growth.

Follow me on Twitter for updates @MartinWaller10

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