UK Edition
Questor: Debt makes this recruitment firm high-risk - but it could be about to turn a corner
A failed acquisition push, thin profit margins and a less-than-pristine balance sheet explain an ugly five-year share price chart at the recruitment and consulting specialist Parity.
But a big management shake-up, a potential disposal and the first signs of improved trading could signal better times ahead for the Aim-listed firm.
Net debts of £6.5m and a pension deficit of £1.6m sit with shareholders’ equity of just £5.9m, so the balance sheet needs some work and interest cover was skinny in 2015, thanks to the pension costs as much as repayments on the debt.
This £9m micro-cap stock is therefore a high-risk play and in no way suitable for anyone of a nervous disposition, as its liabilities could still smother any recovery.
However, the chairman, Lord Freedman, the chief executive, Alan Rommel, and the finance director, Mike Aspinall, have started to tackle Parity’s problems since their arrival in 2015.
Their focus is the consultancy arm, which makes higher margins than the recruitment business and is now targeting a potentially lucrative niche in the utilities sector, helping water firms prepare for deregulation.
The defence and health sectors could also generate steady demand. A brief update from the firm in December hinted at improved trading and suggestions that a non-core division could be sold offer further scope for reducing those uncomfortable debts.
Lower debt means lower interest costs and therefore lower risk, which could help to revive the flat-lining share price via the twin benefits of higher earnings and a higher rating.
Given the risks, however, a 20pc stop-loss could be useful here.
Questor says: speculative buy
Ticker: PTY
Update: CLS Holdings
All eyes are on the full-year results from the property developer and manager CLS Holdings on March 8 after an announcement that it will tart to return cash to shareholders via dividends rather than twice-yearly share buybacks.
The first payment will cover the second half of 2016. The total buybacks paid in 2015 came to £19.1m and the first-half figure was increased by 10pc.
The same rate of increase in the second half would make for a total return of £21m. That would be the base for 2017’s dividend and represents a starting yield of 3pc, a further attraction for a stock that trades on a hefty discount to its net asset value of £22.82 per share.
Commercial property could well suffer some lumps and bumps but CLS is well placed to weather them and income hunters can let the future dividend reliably compound.
Questor says: buy
Ticker: CLI
Update: Royal Dutch Shell
Oil prices are finding it hard to crack the $55-a-barrel barrier as last year’s recovery is leading to sharp increases in oil rig activity in the US and around the world.
That in turn is prompting fears of a fresh reversal in oil’s fortunes. This explains why Shell has given up some ground of late, although we have still made healthy gains on our tip of Oct 4..
Investors can take additional comfort from the full-year figures announced earlier this month. Cashflow improved nicely as Shell digested BG, cut capital expenditure and kept a lid on costs. Dividend cover is still thinner than ideal but disposals can help take up the slack in the short term, and the higher the oil price goes, the safer the prospective 6.7pc dividend yield becomes.
Questor says: hold
Ticker: RDSB
Update: Severn Trent
The water industry keeps churning out good news, to the potential benefit of Severn Trent, whose shares continue to grind slowly higher.
After the FTSE 100 firm’s own very solid third-quarter trading statement, discussed here last week, its rival Pennon released a robust update of its own, flagging strong returns on equity at South West Water.
Such good sector-wide numbers are not going unnoticed, as an Australian infrastructure investor has bought the 50pc stake in South East Water it did not previously own, affirming the sector’s long-term attractions to patient income-hunters in particular.
The well-covered dividend equals a 3.5pc yield, with scope to grow, especially if the regulator encourages greater competition.
Questor says: buy
Ticker: SVT