US Edition Mouchel
286p +49
Questor says HOLD
Corporate finance departments may have been busy over the past year raising funds in rescue rights issues, but Questor believes the focus will be on merger and acquisition (M&A) activity next year. That should please City advisers.
For company directors 2009 was a year of uncertainty – for repairing balance sheets, cutting costs and making sure their businesses would survive the deepest recession most people had ever experienced. But things have changed significantly.
Fear has slowly started to evaporate and companies can look to the future once more. We are not out of the economic woods just yet – far from it – but activity will slowly return to a more normal level.
Even with the spectre of a double-dip recession still hanging over the markets, things are definitely brighter entering 2010 than they were at the start of last year.
The gap between a seller's expectation and the price an acquirer will pay for a business has started to close. This is why M&A activity will increase. The past 12 months should have been a fantastic time for cash-rich businesses to snap up assets – had owners been prepared to sell at bargain-basement prices.
Activity has already started to increase. Road and infrastructure contractor Mouchel is currently at the centre of bid interest from outsourcing company VT Group.
Questor's recommendation of Mouchel shares in March has not been covered in glory. Far from it. In fact, at one time Mouchel was the worst-performing recommendation of the last year following its profit warning. The shares plunged 30pc after this announcement in June.
The warning was prompted by problems in the Middle East, in its rail business and in management consulting markets. The company has since closed its operations in Dubai and is seeking to recover £10m in debts. It has also restructured the consulting business.
Since then, the share price has been subdued, as is often the case with such warnings, as management needs time to rebuild credibility after disappointing investors.
On Friday, the company reassured the markets that things had not got worse. It said that management expected to meet lowered expectations for the full year, helped by a strong order book and bidding pipeline.
Yesterday morning, the group confirmed market speculation that it had received an approach from VT Group, which is transforming itself after the sale of its
shipbuilding business to BAE Systems earlier this year. Mouchel's shares have now bounced almost 60pc since last Wednesday.
Mouchel said that VT has made two approaches, but the board has rejected them as "wholly inadequate and at a level which substantially undervalues the company". No financial details were released, but market speculation put the level of the bid at about 250p a share, which is still below the initial recommendation price.
The shares certainly seem cheap. Even after the recent surge, the shares are only trading on a December 2009 earnings multiple of 9.2 falling to 8.7 next year. The yield is 2.6pc.
Despite the low valuation, concerns remain over near-term trading at the group. However,
the bid has highlighted the value of Mouchel's businesses, particularly at a time when outsourcing by central and local government looks set to gather pace.
There is also speculation that Serco and Capita may be waiting in the wings to counterbid if a formal approach materialises. However, this is not a certainty and investors should not buy shares on bid hopes alone.
Shares in Mouchel were recommended at 286p on March 19 and they are now down
16pc, compared with a market up 43pc.
The stance on Mouchel remains hold.
Bunzl
571p -3½
Questor says BUY
Shares in distribution and consumables group Bunzl were recommended as a buy in December last year because of the relative safety of its revenues.
The group, although not immune to the problems created by subdued economic activity, has relatively recession-resilient revenues.
Yesterday's update was reassuring. The group said revenue had risen by 11pc so far this year, but most of this was down to currency moves. Stripping out the effects of
foreign exchange, revenues slipped 1pc. Given the events of the past year, this is a respectable performance.
Overall operating margin has improved versus the first half, largely due to cost-reduction initiatives.
Underlying revenue growth in North America during the second half was slightly stronger than the 2pc reported for the first six months. However, in the UK and Ireland revenues continue to be down.
Bunzl remains a quality share to own in uncertain markets. The shares are trading on a December 2009 earnings multiple of 12.4 times, falling to 11.8 next year. The yield is 3.3pc.
The shares were first recommended at 571p on December 21 last year and the shares are up 14pc compared with a market up 23pc.
As a defensive play with gearing to an upturn, the stance on the shares remains buy.