Investment Column: CRH is pick of troubled building sector

London Capital Group; Sinclair (William) Holdings

Our view: Avoid for now

Share price: €20.15 (+€1.29)

Ordinarily, when a company says that the rest of the year will be "extremely challenging", investors should run a mile. Yesterday, however, shares in the Irish building materials group CRH jumped 6.8 per cent after it said that 2008's full-year pre-tax profits would be in line with previous predictions, at around €1.6bn, representing a mid-teen percentage fall on 2007 numbers.

The problem facing investors is that while CRH is performing well in its sector, the building industry as a whole is taking a walloping. Any group in the industry, irrespective of size and geographical diversity, can expect its share price to come under pressure as the recession continues – CRH is down 24 per cent in the last year. Miles Lee, chief executive, concedes that the industry will suffer in 2009, but points out that CRH has operations in several markets, and has been more prudent in its expansion into the emerging markets.

Most analysts say that if you want stock in the building sector, CRH is about your best bet. Those at Cazenove point out that the company "holds two clear advantages over its peer group; it is financially better positioned with Ebitda/interest cover of 7.5 times and its exposure to any US infrastructure stimulus package is relatively larger. Market conditions are very challenging but input costs are reducing. A price-earnings ratio of 10 times for 2009E is undemanding in our view given the potential for medium-term earnings per share recovery."

The group is still going to face a tough year as the recession bites. We would argue that CRH will eventually emerge as a strong performer, and if it is building stocks investors are after, which would be odd at the moment, plump for CRH and hold on to your hat. If not, avoid what is likely to be a tough few months. Avoid for now.

London Capital Group

Our view: Buy

Share price: 287p (+29p)

For months now we have been hearing about a financial services industry in serious strife and yet, phoenix-like, London Capital Group, the online financial spread betting firm, said yesterday that it will post better full-year results than previously predicted.

The stock was up by 11.2 per cent yesterday, continuing a trend of the last month, which has seen the share price jump by over 10 per cent. Investors will also cheer the fact that the group said yesterday that it is increasing its dividend and that it has recorded bad debts of only around £100,000, a drop in the ocean compared with the £12.5m of pre-tax profits that analysts at the house broker Cenkos predicts the company will report. Cenkos and independent watchers at Daniel Stewart describe the group's 2009 price earnings ratio valuation of nine times undemanding, and both recommend that clients buy the stock.

The reason the group is performing well is simple, says the chief executive, Frank Chapman, who points out that clients make money on volatility and that we live in volatile times.

Is it all too good to be true? If there is a fly in the ointment, it is the stock's performance over the last 12 months, which has traded down by 38.6 per cent and is broadly in line with the performance of the wider market. If the market as a whole is ignoring London Capital Group, then maybe so should buyers; however, before yesterday's update the shares were trading close to their 12-month low, and that is too low for a group that is performing so well in the current turmoil. Buy.

Sinclair (William) Holdings

Our view: Cautious hold

Share price: 50p (+5.5p)

Investors in the commercial horticulture and branded garden products group William Sinclair Holdings hoping to see green shoots of recovery in the new year are likely to be frustrated after the company issued full-year results yesterday. Pre-tax profits were down to £521,000 from £1.4m 12 months ago, with the group describing the numbers as "disappointing". Investors should be nervous that the group supplies most of the UK's garden centres, which rely on what is shaky consumer confidence.

It is not all bad, however. The chief executive, Bernard Burns, says that yesterday's poor numbers were in part due to bad weather in the crucial spring months, and because during that time, with oil approaching its highs of $147 a barrel, inflation dealt a blow to the group, which sees 75 per cent of its costs going in transportation.

Mr Burns also points out that Sinclair will maintain its dividend at 1p.

The market was not overly distressed, and sent the shares soaring by 12.4 per cent. We would be more cautionary leading up to what could be a tough year for gardening retailers. If the weather goes Sinclair's way and consequently people prefer to work in their gardens to save on other spending during the recession, it could be a stock worth having. Cautious hold.