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Investment Column: Rolls-Royce deserves its premium rating

Huntsworth; Restaurant Group

Nikhil Kumar
Friday 02 September 2011 00:00 BST
Comments

Our view: Buy

Share price: 649p (+9p)

It comes as little surprise to us that Rolls-Royce has bounced back from its problems last November, when a Qantas Airbus was forced into an emergency landing in the wake of the near disintegration of one of the engineering group's Trent 900 turbines.

The company saw £1bn wiped off its value as a result of that incident, but since then the shares have recovered ground. They have also bounced back from the recent stock market convulsions, which hit valuations more or less indiscriminately.

Yesterday, the FTSE 100-listed company added to its portfolio of businesses, buying R Brooks Associates, a specialist civil nuclear reactor services business in the United States.

Despite the concerns raised about the nuclear industry in the wake of the recent high-profile problems in Japan, we still think it that boasts a strong outlook in the medium to long term. Yes, there will be ups and downs along the way but, one way or another, we need energy that doesn't heat up the planet. Like it or not, nuclear can help meet this need.

So, this looks to be a sensible move by Rolls-Royce. We were buyers at 599.5p in November and the shares have performed well for us since then. They were a cheaper buy a few weeks ago and, based on their earnings multiples, aren't exactly a bargain at 14.6 times this year's forecasts, falling to 13 times on the estimates for 2012, with a prospective yield of 2.7 per cent, then 2.9 per cent.

That puts the company slightly ahead of global peers but, given this organisation's diversified businesses, strong management and robust balance sheet, we think that this premium is deserved.

Rolls comfortably met hopes when it released its half-year results in July and we don't see it letting investors down any time soon. As such we'd keep on buying.

Huntsworth

Our view: Buy

Share price: 60p (-1.5p)

Good things come to those who wait, or so goes the old saw. But stock market investors, an impatient lot at the best of times, appear to be in no mood to hang around Huntsworth, the public relations group that has seen its shares trade down in the wake of last week's results.

On the face of it, the figures did look far from inspiring. The company, which counts Grayling and Citigate among its brands, said pre-tax profits had declined over the first half of the year, while its margins narrowed. Crucially, however, it added that business would recover in coming months and over the start of next year as recently bagged accounts begin to bear fruit.

The wins are "only now emerging from the lengthy client procurement process and frustratingly will only make a very small contribution to 2011 results", said Huntsworth. This delay was also behind the softer margins, as Huntsworth has been readying itself for the new business. To put it another way, the figures should stabilise once the revenues begin flowing in. This is hardly doom and gloom.

So far, so straightforward. But – and here is our key concern – much of the Western world appears to be slowing, and we worry about the impact of another downturn on its clients. To resort to another cliché, if they sneeze, Huntsworth could end up with a cold.

On the other hand, it has won some good accounts and – here is the key attraction – it trades on multiples of around six times the estimates for next year. All the while, it boasts a forecast yield of around 6 per cent. We are happy to wait for the rebound.

Restaurant Group

Our view: Buy

Share price: 290p (+4.1p)

Amid all the grim talk about the high street, it is easy to forget many businesses that rely on consumers opening their wallets on a regular basis are doing rather well.

Indeed, away from the plummeting sales of big ticket furniture and washing machines, some restaurants that offer individuals good food for well under £10 are thriving.

Take the Restaurant Group, which operates the Frankie & Benny's, Chiquito and Garfunkel's brands. It showed good form in the half year to early July, growing adjusted pre-tax profits by 7.7 per cent to £24.6m.

The group also grew its sales on outlets open at least a year by 3 per cent, adding it had continued this momentum since the period end, despite the riots in August and downbeat consumer spending.

On a forward earnings multiple of just over 11, we think the Restaurant Group is worth a nibble.

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