Trashing of Corus price gives buying opportunity

Detica shares look cheap; London Merchant's discount unfair

The city's dealing rooms are fevered places where, last Friday, traders hallucinated a profit warning from Corus, the former British Steel.

Although the company has been chatting to analysts and investors over the past couple of days, the meetings were not intended as a forum to impart horrific news on current trading. Some forecasters have nudged their numbers down, but most seem to have been wholly unmoved.

Which makes the trashing of the Corus share price on Friday – only partially reversed since then – a buying opportunity for investors.

Corus has made progress in improving its operational efficiency. That is City-speak for axeing 10,000 jobs. Redundancy costs mean a dividend is again unlikely this year, but Corus shareholders can now enjoy the immediate advantages of rising steel prices.

These have been rising in part because of protectionism in the US. This is unlikely to hurt Corus, which makes only limited sales in the US. More important, widespread reductions in capacity across Europe and Russia, plus the prospect of improved demand, initially in Asia and – it seems – in specialised markets in Europe, are already pushing global prices higher. Although the first quarter of this year was poor, price rises since then have stuck, and Corus plans more. The prospects for 2003 look good.

The group is also preparing to sell its aluminium business after deciding it is too small a player to compete in that sector. Up to five candidates are expected to submit final bids next week and the sale should net between £800m and £1bn. That can be used to reduce debt and increase the group's financial flexibility to pursue other steel investments, perhaps in South America.

Any investment judgement on Corus, though, is most usually based on crystal ball gazing into the future of the macro economy. In particular, it hinges on views of future currency valuations and future economic growth.

In the US, sliding stock markets and lacklustre prospects for company profits are putting downward pressure on the value of the dollar. That is good news for Corus, which buys many of its raw materials in dollars. The rising euro is also a plus, since more than two-fifths of its sales are inside the eurozone. And the longer-term prospect of the UK entering the euro could push sterling lower against the continental currency, reducing the advantage that eurozone rivals have traditionally had over Corus on labour costs.

The steel price is ultimately dependent on rising global demand, and that requires an economic upturn which still looks fragile. It is certainly true that an early slump in consumer demand could snuff out the early signs of rising confidence in industry. That remains the biggest concern for Corus shares, but it is not the consensus view of economists and the Corus share price has certainly not yet priced in a full economic rebound.

Goldman Sachs, which cut its 2002 profit forecast yesterday, puts the stock on just 4.4 times 2003 earnings, at yesterday's price of 83.5p. With plenty of room for upgrades, the stock has further to go.

Detica shares look cheap

You never have to look far for signs that the stock market is still profoundly out of love with technology companies, but one of the most dispiriting scraps of evidence in recent weeks has been the share price performance of Detica, which floated at the end of April and was trumpeted as the first tech stock to brave the main market in more than 18 months.

Even after being forced to slash the price of its share offering from a range of 440p-510p to 400p, the value of the IT consultancy group has slipped a further 15 per cent since starting trading. It got a little bit of a bounce after reporting its maiden results yesterday, but still sits at just 339p.

That's not fair. The company provides consultancy services to blue-chip clients who need to integrate their different customer relationship software packages. New customers this year include Eurostar, mmO2 and Prudential, and turnover in this division has soared 49 per cent. Overall group revenues were up 23 per cent to £32.8m and profits grew 27 per cent to £5.9m, excluding the costs of its flotation.

The expectation is that, while businesses' spending on new software has dried up after the late Nineties' binge, IT managers will still have cash to spend on improving the efficiency of their current systems – and that is where Detica comes in.

The group also has a useful "national security" division, which sells software to Customs & Excise, the Ministry of Defence and MI5, among other Government agencies. This grew 25 per cent last year, and is likely to reap even stronger dividends this year. The intelligence services are estimated to have increased IT spending by 10 per cent on a year ago, and look likely to get a big boost to their budgets in the wake of 11 September.

Detica trades on 15 times its broker's forecast earnings for the current year. It's cheap.

London Merchant's discount unfair

Strange Beast, London Merchant Securities. The company is half property group, half venture capitalist. The company's shares are not ever going to be most tax efficient way to invest in these asset classes, but its conservative management should generate good returns for an investor willing to tuck the stock away for a while.

It has had a poor year, though. That is mainly the fault of the venture capital side, which has previously been skewed towards telecom and technology investments in value terms, if not in actual numbers of investments.

The pre-tax loss for the year to 31 March was £36.1m, compared to a profit of £60.3m the previous year. The write-down of the value of the venture capital investments was £57.7m. The group has also suffered because the slumping equity markets have meant flotations for its investee companies were off the cards, so there has been little opportunity to realise profits.

This situation, grim as it is, will not last forever, and London Merchant's average investment is only 3.5 years old while it normally holds them for about seven years. Returns should return towards the 34 per cent per annum averaged over the past decade.

Meanwhile, development work on its broad portfolio of leisure, office and retail properties should enhance asset values. These have proved robust in the past year, as has rental income.

The company has an unexciting property business that pays the dividends (the stock has a prospective yield of just over 4 per cent) and a venture capital side that, over the medium term, should provide the strong capital growth. The shares, unchanged at 152.5p yesterday, sit at a 31 per cent discount to net asset value, wider than the rest of the property sector and unfair given its greater growth prospects. Buy.