Time to avoid highly rated Taylor Nelson

Taylor Nelson Sofres; IMI; Minerva

In good times and bad companies will pay to find out about their customers. As the "mass market" morphs into increasingly complicated segments, targeted research has become an indispensable tool for business.

So it was that Taylor Nelson Sofres, the Anglo-French group which ranks fourth in the global market research league table, yesterday attempted to brush aside the broader agency sector's pervading gloom. It did so after unveiling a better-than-expected 9.1 per rise in interim pre-tax profit to £17.1m. TNS also managed a 14 per cent hike in the dividend to 0.8p.

Behind the headline numbers, however, the results were a bit less rosy. After goodwill charges related to acquisitions – over two dozen in the last four years – TNS actually turned in a 7 per cent decline in earnings to £12.8m. And while operating profit margins rose by 0.5 percentage points to 8.5 per cent, Mike Kirkwood, the chief executive, cautioned that margin improvement to the long-term goal of 12 per cent could be delayed by further deals.

That, of course, leaves plenty of headroom for incremental gains. But it also begs the question why TNS should be focused on growth to the exclusion of earnings per share out-performance.

Though TNS managed an almost 7 per cent like-for-like revenue advance, there is a strong possibility that it will trail the cycle. Unlike, say, the ITV companies, whose advertising sales downturn last autumn anticipated the turn in the economy, TNS may well face a slower environment going forward.

A further concern with TNS is the business mix with 55 per cent of revenue from project income and the remainder from continuing contracts. The proportion of the latter has been rising but likely needs to be above 65 per cent to provide ample insulation from a slowdown. Finally, the group's lack of exposure to North America, while perhaps a benefit in the first-half, will make it hard to outperform in the long-term when the US economy, as is its custom, rebounds more quickly than the European markets where TNS does most of its business.

After three years out-performance, much of the relative advance has been lost with the shares off 37 per cent in the past year, closing yesterday at 194p, down 12p. Given forecast EPS of about 8p, TNS is on a prospective price/earnings multiple of 24. That expensive rating will probably deter potential suitors, such as United Business Media or WPP Group. Until the rating comes down, investors should avoid the stock.

IMI

On a day when the latest downturn in the TMTs briefly pushed the market to three-year lows, IMI, the Birmingham-based engineering group, provided some unexpected uplift. Though the 10 per cent fall in interim operating earnings to £82.6m had been foreshadowed in a July trading statement, the market welcomed new plans to restructure the company.

Two key business areas covering valve and pneumatic systems as well as drink dispensing technologies will be kept, transformed and expanded by acquisition. Other areas, notably the building products businesses, which account for about 35 per cent of total annual sales of £1.6bn, will be sold.

Martin Lamb, chief executive since January, knows it is a tall order to drive IMI forward given what he termed "a tough US pneumatic market" and continued "difficult trading" conditions in the German construction market. Nor is a quick fix being promised: a full turn-around, he said, is two to three years off.

During that time the plan is to expand outsourcing of low value added manufacturing. Matched with that will be investment in specialised marketing, systems engineering and service provision. Just when the building products operations will be sold wasn't made clear, but early sales at the current depressed valuations would seem unlikely.

For the time being, IMI will concentrate on generating cash flow, which rebounded to £49.3m in the first-half, to finance a 6p interim dividend. With the total pay-out forecast to rise to 15.7p, the shares, up 4p at 215p, offer a prospective yield of 7.3 per cent. For that to occur, IMI needs to hope sales in US and European markets stabilise. That may prove a tall order.

Minerva

Minerva has become a darling of the property sector for a series of bold plans that it has unveiled, including a huge retail scheme in Croydon, south London, and two major City proposals. Led by the canny Andrew Rosenfeld, the company used yesterday's results to announce another grand plan.

Minerva's net asset value rose 17 per cent to 332p, for the year ended 30 June. But this was overshadowed by news of the St Botolph scheme – a giant 1 million sq ft structure to be built in the City. The scheme could be worth £1bn when completed and it is likely to receive a sympathetic hearing at the Corporation of London.

You would have thought that news would put a rocket under Minerva's shares. Yet the stock closed up just 9p at 290.5p, well off the 353.5p March peak. The reason for this is some scepticism towards the company.

All these impressive schemes are at the planning stage. Many doubt Minerva's intention or even ability to execute on them. It seems likely that, having secured planning consent and a tenant, Minerva will either sell the schemes or bring in a development partner.

There's potentially a lot of upside but given the execution uncertainties and current economic climate, which does not favour large new lettings, the shares are only a hold.