Investment Column: Logica is improving, but don't buy just yet

Kier Group; Fiberweb

Our view: Hold for now

Share price: 66p (+4.25p)

The IT group Logica spent the better part of last year telling anyone that would listen that there would be no more financial uncertainty, or profit warnings, or worries about debt, or dodgy acquisitions, so it was disappointing last October when rumours of more bad news about debt and profit warnings surfaced. Thankfully nothing materialised, and despite the share price sinking by nearly 40 per cent in the last year, the group was able to issue a decent set of full-year numbers yesterday. The shares rose 6.9 per cent, encouraged by the group's upbeat outlook. Logica says it expects to outperform the IT sector in 2009 as clients look for a one-stop shop for IT services, which will benefit big providers like Logica, they say.

So there are reasons to be cheerful about the future. Analysts at Evolution also point out that "Logica is rated at about 7 times debt-adjusted price-earnings ratio for 2009, which looks cheap versus the sector", and set a target price of 82p. The problem is that the group will be caught to some extent by the recession: while growth for the whole of 2008 was 5 per cent, fourth-quarter growth fell to 1 per cent. The chief executive, Andy Green, is confident that growth will continue throughout 2009, but concedes that it will not all be plain sailing.

We are impressed by Logica's performance and in particular its reduction of debt, which has been cut to just 1.2 times Ebitda. We are concerned that the downturn is starting to make inroads, however, and that that might dampen the share price. Hold for now.

Kier Group

Our view: Tentative buy

Share price: 916p (+1.5p)

Things must have come to a pretty pass when simply not making a loss is worth a "buy" recommendation. But such are these interesting times – particularly in construction.

Kier Group's first-half numbers, published yesterday, show profits of £26.4m, and though the figure may be more than 40 per cent lower than last year's £45.6m, it is a profit nonetheless.

There is carnage in the building sector as plummeting consumer confidence and frozen credit markets decimate demand for property.

Kier's strength is its healthy order book, which was worth £1.5bn at the end of December, thanks to still-growing public-sector business and existing framework agreements. The support services division is also doing a brisk trade, with profits up by 37 per cent to £19m.

Analysts at Cazenove are fulsome: "The attractions of Kier are manifold: cash on the balance sheet, high and growing visibility in its construction and support services divisions, and an increasingly balanced exposure to the housing and regeneration markets."

But there are no dead certs in the unpredictable current climate, and builders are a bigger punt than most. Kier's land bank was written down by a further £12.2m in the period. And while its hard-hit Homes and Development divisions may have managed to scrape a profit – of £400,000 and £600,000 respectively – the fall-off is staggering. Homes made £7.5m in the same period last year, Development £20.5m. With these caveats, Kier is nonetheless a tentative buy for investors looking for thrills. Tentative buy.

Fiberweb

Our view: Hold

Share price: 27.75p (+3p)

Good news for Fiberweb shareholders yesterday as the announcement of the group's full-year results sent the stock up by 12 per cent.

In truth, much of what the non-woven fibre maker Fiberweb produces is about as resilient as you can get in these times of woe. Its hygiene division, which makes up 62 per cent of the group and churns out products such as nappies, can hardly be considered a discretionary sector, and the chief executive, Daniel Dayan, argues that much of its other arm, industrials, which makes items such as replaceable filters, is also defensive.

Analysts at Cazenove disagree on the industrial business, arguing that "the group is likely to see some challenges, particularly within its industrial division, over the coming year as a result of the weaker economic environment".

The experts do concede, however, that yesterday's full-year numbers, which showed a tripled pre-tax profit at £9m, were beyond their expectations.

The problem facing investors is that the share price appears to be deaf to the good news, having dropped 55 per cent in the last year. Yes, the group, trading on a p/e of 4.2 times, does not look expensive, and with a maintained dividend at 2.5p, the dividend looks good at about 15 per cent.

We think Fiberweb's story is defensive, but the shares are not, and for that reason we would wait before buying. Hold.