Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Simon Shaw, managing director of EEA Fund Management Ltd
The UK financial sector struggled in the first six months of 2007, with rising interest rates and worries about the property market holding back progress. Recent problems in the credit market – in particular the sub-prime mortgage market in the US – have done little to ease investors’ concerns. EEA believes that the UK financial sector offers good potential going forward and is well placed to benefit in a market bounce back, with much of the bad news discounted in share prices.
Stockmarkets, for example, have made Paragon (PAG) a pariah, cutting the share price from a high of 715p in October 2006 to a low of 364p in September 2007. For the year to this month, the City expects pre-tax profits of £91.5m, earnings per share of 57.2p and dividends per share of 20.4p. At 379p, this is a p/e of 6.5 and a yield of 5.4%. This implies a significant contraction. Paragon is the market leader in buy-to-let mortgages in the UK; on average, its customers own ten properties, with loan-to-value estimated at about 50%. Paragon finances its mortgages via an on-balance sheet warehouse facility and then places mortgage-backed securitisations, which have performed very well. Current capacity on Paragon’s balance sheet is at least six months’ worth of current new business volumes.
Credit markets experienced liquidity squeezes in 1994, 1998, 2001 and 2003, so today’s environment is not unique. It may be more protracted than before, but in the end liquidity will be restored. The price of funding may rise, but it seems highly likely that normal money-market activity will return within six months, by which point it seems entirely possible that a pariah may once more have become a paragon.
Another investment we like is Eurovestech (EVT), a development capital fund focused on high-technology enterprises. The value of its portfolio of investments could considerably exceed its current share price of 18p. Its star investment is ToLuna, the online market research services group, which has grown rapidly since floating in 2005. Eurovestech has already realised £7.4m cash from an investment that cost it just £2m, and its remaining 50% stake is valued at £36m. Other promising investments include KSS, which sells “smart” pricing systems to retailers and petrol stations, including BP and Wal-Mart. Bought for £1m, it has been valued by brokers at £18m. Magenta, meanwhile, sells intelligent software technology and expects operating profits this year. These three alone could be worth more than Eurovestech’s market value of £57m, leaving some of its most exciting stakes – in Arkex (oil drilling services) and Mist (potentially revolutionary music remastering technology) – in for nothing. The group has net cash and a solid balance sheet.
Helphire (HHR), which has been a long-time core holding for our portfolios, provides replacement cars to drivers whose own vehicles have been damaged in accidents. This service has become more accepted in the insurance industry. Helphire has seen rapid growth via organic growth and acquisitions. On a relatively fixed cost base this is now coming through into profits and market forecasts are for earnings of 20p-23p per share in the year to June 2007, followed by 30p the following year. The dividend is seen as rising to 10p, then 12p. At a share price of 377p, this represents a June 2008 p/e of 12.5, which is modest for the growth being delivered.
The stocks Simon Shaw likes
Stock, 12mth high, 12mth low, Now
Paragon, 715p, 245.50p, 277.75p
Eurovestech, 22p, 17p, 17.8p
Helphire, 453p, 314p, 375.25p