Midas Extra share tips: Meggitt and IDOX

By Joanne Hart for The Mail on Sunday
Updated: 12:49 EDT, 15 January 2010

Midas Extra

Meggitt
Epic: MGGT

Another week, another rights issue from the banking sector. Last week, it was the turn of Royal Bank of Scotland to ask shareholders for £12bn of their money: this week, HBoS had a more modest request, asking investors for a mere £4bn, again in the form of a deeply discounted rights issue.

Brokers are convinced that HBoS will not be the last bank in the UK to ask for cash. Barclays is widely rumoured to be lining up a rights issue in the near future too. In the meantime, some brokers are actually viewing the RBS and HBoS cash calls as good news. Institutional investors expected the banks to call on shareholders for help and, now that the call has come, there is a feeling that they may finally be facing up to reality.

Stock market sentiment has also been helped by strong performances from the oil and mining stocks, which are benefiting from the continued high prices of commodities and crude oil.

Caution is still paramount but the FTSE 100 index did breach 6100 for the first time since mid-January this week and the FTSE All Share also showed promising gains.

Within this context, Midas continues to recommend stocks with good underlying growth prospects, run by strong, well-respected management teams.

Meggitt is a classic example of this type of business. The company has two broad divisions: it makes parts for aeroplanes and it manufactures sophisticated kit for the defence industry.

The company's share price has suffered amid fears that profits will be hit by the economic downturn. But supporters of the stock point out that Meggitt is a lot more resilient than it initially appears.

Almost half the group's revenues come from after-care services, that is repairing faulty kit and supplying new parts if the existing bits and pieces become too old and decrepit. Most aeroplanes have a 30-year life so there is an awful lot of repair work to be done during that time. And if airlines buy fewer planes, they invariably need more after-care help as their planes grow older and require more maintenance. Intriguingly too, this part of the business is a lot more profitable than the initial sales.

Meggitt is benefiting too, from a surge in demand for planes from emerging economies such as China, India, Russia and Brazil. The group has orders stretching out for several years and even, if some are cancelled, there are still plenty on the books.

The defence arm is considered relatively recession-proof too. America spends more on defence than any other country in the world and it is expected to increase spending in this area by around 7% next year, whoever wins the presidential elections in November.

Meggitt itself is extremely confident about the future. At its annual meeting last week, chairman Sir Colin Terry said he believed the group will make good progress this year and beyond and he pointed out that the dividend for 2007 was more than 11% ahead of the previous year.

This company is big, with customers spread out across the world and a workforce of more than 8000 people. Group profits are forecast to rise at least 20% this year to around £170m and a further 20% in 2009 to over £200m.

Midas verdict: Meggitt shares are trading at 295p but most brokers in the City believe they are worth a lot more. Buy and hold.

IDOX
Epic: IDOX

Our second company is small and UK-based but the management team is highly ambitious and the business is growing fast.

IDOX designs computer programmes for local authorities. The company has been going since the 1990s but underwent a mini-revolution in 2006 when chairman Martin Brooks and chief executive Richard Kellett-Clarke were brought in to turn the business round. They set about focusing IDOX on the local authority market and so far, they seem to be doing rather well.

Local authorities spend more on IT than any other government department and last year ran up a bill of £3.8bn on computer-related expenditure. This may sound like an awful lot but there are 460 authorities and they are desperately trying to move as much work as possible onto the internet and off their desks.

The trend is good news for companies such as IDOX and good news for the person in the street too. IDOX was recently awarded a contract, for instance, to computerise planning applications in Scotland. This means that people can either make applications or follow the progress of applications online, instead of spending hours trying to get through to harassed and frequently unhelpful council workers.

The Scottish contract is worth more than £2m over the next three years but most IDOX contracts are worth between £10,000 and £100,000 and councils can see savings coming through almost immediately. Frequently, more efficient use of technology means fewer staff need to be employed or even that less space is taken up with acres and acres of paperwork.

In the 12 months to October 2007, IDOX made profits of £1.1m, against a loss of £500,000 in 2006. The City expects profits to grow significantly over the next few years, as local authorities become increasingly enthusiastic about the benefits of IT.

Midas verdict: Many computer companies working in the public sector have been snapped up in recent years by bigger businesses or private equity firms. IDOX may well follow suit in time but even on its own merits, this is a sound company with good prospects. The group is valued on the stock market at around £35m but Brooks has set his sights on turning this company into a £100m business. He and Kellett-Clarke recently bought 450,000 shares in the business themselves – which is generally a good sign. Currently, the stock is trading at 10.5p. Buy and watch for further developments.