Three to buy
(Investors Chronicle) Rentokil has shed non-core divisions to return to its pest-control roots in recent years. This is a defensive business in a structurally growing market: populations worldwide are urbanising, meaning more rat infestations, while workplace hygiene regulations are getting ever stricter. There are big opportunities in both emerging economies and the group’s key North American market, which is ripe for consolidation. On 31 times forecast earnings the shares are not cheap, but still trade on a discount to peers. 471p
(The Mail on Sunday) This Aim-listed business provides public-sector software that makes interactions with government run more smoothly. It works with over 90% of UK local authorities and also tracks 11.5 million patient records for the NHS. The shares rose as high as 77p in the summer of 2017, but the firm overexpanded and took on too much debt, prompting a share-price plunge. New management is now turning things around and brokers are forecasting surging profits this year and next. “The best is yet to come.” 35p
(Barron’s) The 2015 merger of Kraft and Heinz, in which Warren Buffett is a significant investor, has been a disaster for shareholder value. The group is down about 60% and has suffered double-digit share-price falls for three years running. A dividend cut is widely expected. Yet the stock is so beaten down that on 11.5 times 2020 earnings it offers value. A turnaround strategy, likely to include asset sales to pay down debt, could spark a rerating. For investors willing to accept volatility, the risk-reward ratio looks favourable at this price. $29
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Three to sell
(The Sunday Times) The stars are not aligned for this “cuddly countryside” clothing and homeware retailer. More than half of its sales are made online, but this market segment is becoming increasingly competitive, meaning higher advertising costs and lower profits. The coronavirus outbreak is also a serious risk to the supply chain of a business that sources 90% of its stock in China. Disasters at other clothing firms show how fast “fickle customers” can ditch brands. Sell. 175p
(The Sunday Telegraph) This business distributes specialist electronic and industrial products such as socket screws and radio parts. The October-January trading period was weak, with falling orders from Germany’s stagnant car industry one of the culprits. The global electronics cycle may now be bottoming out, but management, which is focused on self-help measures to lift performance, faces a “daunting to-do list”. With the shares up by 15% since October 2018, this looks an opportune moment for investors to take profits. Sell. 706p
(Shares) Sentiment is turning against this magazine publisher. Management shrugged off a report last month by short-seller ShadowFall Research that said the group was overstating organic revenue growth. A similar charge sheet from another short-seller last year suggests that questions about the firm’s acquisition strategy and accounting are starting to carry more weight. “Wait on the sidelines until there is more clarity.” 1,366p
...and the rest
The Daily Telegraph
Management in the Japanese stockmarket is increasingly focused on shareholder value. British investors can gain exposure to the trend via the AVI Japan Opportunity Trust (114p).
Promotional products marketer 4imprint, which supplies “bags, pens and umbrellas adorned with company logos”, is operating in a fragmented market so there is plenty of room to grow (3,300p). Motor finance group S&U is well placed in a growing market and pays an attractive 6% forward dividend yield (2,180p). Slowing markets and a record of negative free cash flow make high-performance foams maker Zotefoams one to sell (415p).
Two significant US acquisitions increase BAE Systems’ exposure to a key defence market and in-demand technologies. The shares are cheap on a price-earnings ratio of 13. Buy (644p). High-end filters manufacturer Porvair is a “fantastic business” that has just reported record revenue, but on 30 times earnings the rating now looks excessive: time to take profits (760p). Contract wins in the US and Europe show that QinetiQ has become a dynamic defence and security business (373p).
Audio-visual equipment supplier Midwich Group has leveraged its specialist knowledge and connections to become a market leader (534p). Law firm Gateley is growing through acquisitions and pays an appealing 4.2% dividend yield. Buy (214p). Paper and packaging play DS Smith is an efficient operator exposed to the growing e-commerce trend. An “exceptionally modest” rating of 10.5 times earnings makes the stock a buy (353p).
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