Mersey can still prove attractive

Mersey Docks; Morgan Sindall; Intec

Investors who settled on Mersey Docks as a safe port to sit out the stock market's recent turbulence chose well. The shares have recovered strongly since dipping briefly below the 400p level in early 2000 and have outperformed the all-share index by 35 per cent during the past 12 months.

Investors who settled on Mersey Docks as a safe port to sit out the stock market's recent turbulence chose well. The shares have recovered strongly since dipping briefly below the 400p level in early 2000 and have outperformed the all-share index by 35 per cent during the past 12 months.

The Liverpool-based company yesterday reported an in-line 6.3 per cent rise in pre-tax profit before goodwill to £29.2m. Sales advanced 24 per cent to £125m, helped by acquisitions, while the dividend rose a half-penny to 6.5p.

A couple of factors hurt margins. Imari, an acquired Irish ports and transport operator, was slow to contribute due to a now resolved labour dispute as well as the need for investment to improve handling systems. Lower international trade volumes, which affected the shipping operations, also slowed the overall performance. This is likely to continue in the second half.

About half of Mersey's sales come from four areas: cargo containers; grain and animal feed; trailerised freight; and fruit handling. While the first three areas are steady, though unspectacular performers, the fruit handling operation at Sheerness in Kent is more likely to deliver long-term growth opportunities, assuming that rates remain steady to make a return on the required hefty investment in handling facilities.

As the UK's number two port operator, Mersey sees more scope for joint ventures and acquisitions outside the country. With debt of £150m offset by cash flow providing six times interest cover, Peter Jones, the chief executive, has sufficient head room to fund incremental deals with either borrowed cash or stock.

Mersey, unchanged yesterday at 572.5p, trades on a prospective price/earnings multiple of 11.7. Investors appreciating the company's defensive merits and its proven ability to secure growth will still find the stock attractive at these levels.

Morgan Sindall

John Morgan, chief executive of Morgan Sindall, is quick to point out that the houses built and refurbished by the construction group are a million miles away from Knightsbridge and Chelsea.

And no wonder. While upmarket housebuilders have been warning of the dearth of buyers for £1m-plus homes, shares in Morgan Sindall, which develops property for social housing associations, have been riding high.

Yesterday's interim results showed sales up 41 per cent to £407m – just £23.6m came from acquisitions – at the half-way stage, with pre-tax profits up 75 per cent cent at £10.1m. The dividend was up 25 per cent, to 3p a share.

The acquisitions of Lovell and Carillion Housing have made Morgan Sindall the UK's largest provider of social housing, putting it in pole position to win business from the Government's various public finance initiative schemes. Meanwhile, the City has become less anxious about the prospects of the group's fit-out division, which reconfigures offices to tight time scales, in a recession.

The shares climbed a further 17p to an all-time high of 480p yesterday, almost double their year-low. That puts them on a multiple of 11 times Granville Baird's forecast earnings per share of 42p this year.

The risk is from the economic slowdown: lower-than-expected tax receipts could force the Government to make tough decisions about housing, and the fit-out division remains vulnerable. But Mr Morgan is confident of doubling profits over the next four years and the shares are worth holding.

Intec

Intec Telecom Systems, which sells software to enable telecoms companies to bill other carriers, shocked the City yesterday with a £133m goodwill write-off that plunged it dramatically into the red.

Pre-tax losses in the nine months ended 30 June totalled £139m, compared with a £1.2m profit in the same period last year, on sales up 120 per cent at £26.7m. But on an underlying, or EBITDA basis, the company beat analysts' forecasts with a profit of £1.6m. It reckons around 40 per cent of sales came from acquisitions.

Nevertheless, the numbers follow a profit alert in March where Intec warned longer sales cycles would lop 20 per cent off revenue forecasts for the year. Intec is suffering from a lack of visibility that could make it vulnerable to further delays in spending.

Analysts now expect Intec to produce an underlying profit of around £3m this year on sales of around £40m, putting it on a heady forward multiple of close to 80 times forecast earnings per share of 1.4p.

But given current economic conditions, there is no hurry to buy the stock yet even though Intec, up 5.5p at 109.5p, is well off its 205p float price. While the recent contract win from Hutchison3G was a step in the right direction, Intec won't be worth a serious look until the telecoms sector starts showing signs of recovery.