Collins Stewart too risky in today's volatile market

Forth Ports looking attractive; Hold onto unglamorous Enterprise

The wily Terry Smith, who runs the stockbroker Collins Stewart, has quite a lot to smile about, despite his matter-of-fact warning yesterday that global equity markets could get a lot worse before they come up for air again.

Mr Smith has completed the purchase of Tullett, the second-largest money broker behind ICAP. Yesterday he reported that Tullett has been doing very nicely since the start of the year, especially in the last two weeks' exceptional volatility.

Going forward, Tullett also provides Collins Stewart with a hedge against the worst excesses of the bear market, which has especially hit brokers for smaller companies where mergers and acquisition activity has dried up almost completely. Overall, the stockbroker reported operating profit before goodwill amortisation of £32.2m, down from £32.9m in 2001. Revenues fell to £98.7m from £104.3m. The dividend is unchanged.

The downturn at Collins Stewart has not been nearly as savage as that experienced by some of its rivals. A significant part of this is because many investors have shied away from using the services of big investment banks for their research as a result of concerns about the independence of the work. While Collins Stewart does corporate finance work as well as research, Mr Smith has made a name for himself as a broker who will not show companies the research his house has produced ahead of releasing it to clients. This helps safeguard its independence.

The fact that the company has weathered the downturn well is reflected in Collins Stewart's share price, which has climbed 8 per cent since the start of the year, though they slipped a penny to 337.5p yesterday. Profits are set to climb back to last year's levels during 2003. It is also taking on more staff and looking for further acquisitions .

Nonetheless, the bedding down of Tullett has barely begun. And however effective a counterbalance it is to the share brokerage side, now is a risky time to invest in a company so dependent on the fortunes of the stock market. Avoid.

Forth Ports looking attractive

Forth Ports, the Scotland-based harbours business that was privatised a decade ago, has the great fortune of sitting on property ideal for trendy waterfront residential property schemes.

The company is really two businesses, a dull but generally steady ports division, and property interests that provide the upside. Forth has seven ports, with all but Tilbury north of the border. Its harbour interests in Edinburgh, a boom City, give the company great potential.

Predictably it was property that provided the gains in yesterday's full-year results. The property business increased profits by 54 per cent to £20.5m for 2002. Group pre-tax profit was ahead of expectations at £43.7m.

The company is refurbishing large sites on the Edinburgh waterfront, partly counting on booming demand for single-person occupancy homes. The granting of outline planning permission last year at its Western Harbour Leith site – a £600m scheme – for the development of 3,000 apartments saw the company sell some plots to Taylor Woodrow. Forth reckons that such plot sales will continue for the next five years. The company is still waiting for planning consent for Edinburgh's Granton harbour site, a scheme of a similar size, which should provide plot sale income for the next 10 years.

On the operational ports side, 2002 is described by Forth as its most challenging year for years. However, after a difficult first half, trade improved in the second six months of the year. This improved trend has continued in 2003.

The shares closed down 16p to 832.5p, putting the stock on a forward multiple of 11. With a break-up value of 1,500p they look attractive.

Hold onto unglamorous Enterprise

Repairing leaking water mains and fixing phone lines might not be the most glamorous of businesses to be in but it's producing a nice income stream for Enterprise.

The AIM-listed support services company provides maintenance services to support the infrastructure of telecoms, gas, water and electricity companies. It also works with local authorities providing grounds maintenance and street cleansing services among other things.

Its 2002 financial figures, released yesterday, were in line with expectations with a pre-tax profit, before goodwill amortisation, of £17.8m, up from £12.2m last time.

But Enterprise has big ambitions and is aiming to grow annual sales from the current £272m to £750m in three years time. It also plans to do this organically. With a forward order book of £1bn as well as being in talks over another £1.5bn worth of business, it might just get there.

The pensions shortfall alluded to in the statement is a relatively minor issue. Top-up payments of £200,000 a year, which it started to make last year, should be enough to clear the deficit in five years' time.

Analysts are forecasting Enterprise's profits to rise to about £21m this year, which puts the stock on a forward multiple of about 11 times. That could look cheap if Enterprise lands a lot of those new contracts. But the shares, which closed down 2 per cent yesterday at 224p, seem up with events for now. Hold.