Investment Column: Home Retail Group can defy the sceptics

Premier Farnell; Allocate Software

Our view: Speculative buy

Share price: 228.3p (-9.7p)

It was a tale of two divisions yesterday at Home Retail Group. While underlying sales declined by just 1.4 per cent at the group's DIY chain Homebase, which was ahead of expectations, like-for-like sales tumbled by a disappointing 8.1 per cent at its catalogue operation, Argos.

The group attributed the poor performance at the latter to weak sales of video games and TVs. They were up against strong comparables from the same period last year while the general market for games consoles has been poor and a sparse pipeline of new releases dragged down sales of games. The 747-strong chain has also been buffeted by its core customers feeling the pinch more than Homebase's more middle-class clientele.

But, while the sales figures at Argos were hardly encouraging, Home Retail did reaffirm its targets for pre-tax profits of £293m this year. In fact, we believe that for the brave investor this is a company that may be worth a punt, particularly after yesterday's sell-off. Why? Well, Argos remains a cash-generating machine, which helps explain the healthy £414m of net cash on the group's balance sheet at the end of its last financial year.

Home Retail plans to use some of this to buy back £150m worth of its shares this year. At the same time the group is stepping up its capital expenditure programme on the high street, with a key focus being the refurbishment of Argos stores.

Furthermore, Home Retail Group's shares now trade on a 2011 forecast multiple of less than 10, which puts them at a nice discount to the retail sector, while speculation over a potential takeover bid, perhaps from the world of private equity, perhaps from Asda, is unlikely to go away.

Last year we said hold at just over 317p, which doesn't look clever now. And economic uncertainties abound. But the valuation looks attractive and the bid potential makes Home Retail worth a look for speculative buyers.

Premier Farnell

Our view: Buy

Share price: 244p (+24.4p)

Premier Farnell's quarterly results prompted a rally in the shares last night. And quite rightly so, in our view. After all, the electronic components distributor posted a 71 per cent rise in underlying pre-tax profits, while underlying earnings were up more than 80 per cent. The City was soon cooing about forecast upgrades, providing further momentum to the rapidly rising share price.

Happily, the outlook is also promising. Readers of this column will recall that we harbour a fair few misgivings about the sustainability of the recovery in Europe and the UK. But we have little doubt about the strength and promise of emerging markets such as India and China – markets where Premier is increasingly active. We are fairly confident that, even if mature markets prove a drag on the results in the months ahead, the company should be able to stand firm, supported by its gearing towards other, more bankable geographies.

The investment case, then, hinges on the valuation and whether the market is already discounting this promise. Given that Premier trades on a multiple of 15.4 times 2011 forecast earnings we don't think that it is. Indeed, that figure declines to 13.7 times on forecast 2012 earnings. All this and a prospective yield that remains solidly above 4 per cent, which is better than what you get in the broader market. Put all that together and this company is a clear buy.

Allocate Software

Our view: Buy

Share price: 70.5p (Unchanged)

Allocate makes software that helps clients to organise staff, focusing on the defence, maritime and healthcare markets. The kit is designed to bring together processes ranging from checking there is enough cover, for example, on a particular shift in a hospital, to providing time sheets that staff fill out. It also provides applications for expenses and payroll. Clients include the NHS, London Ambulance Service, the British Army, Royal Navy, Nato and Norwegian Cruise Line.

There are worries about the UK market (although overseas contracts should help revenues) but there were no signs of problems yesterday as the group said it would report full-year results ahead of expectations. Should the UK prove better than feared then there could be further upgrades. The group also announced a string of new contracts. Numis recently predicted revenues would hit £30.6m in two years with profits more than doubling from 2009. It has the stock on an undemanding 11.1 times forecast 2012 earnings and fund managers from Gartmore, Jupiter Asset Management and BlackRock have all taken significant stakes. We're with them. Buy.