Belfast Telegraph

Sunday 23 November 2014

Investors seeking a comfortable fit might like to try the Debenhams recovery play

Autonomy; Solana Resources

Our view: Buy



Current price: 103.75p



The conventional wisdom on profit warnings is to sell on the first and buy on the third. Debenhams has delivered three profit warnings in the last 10 months, so is now the time for brave investors to dip their toes in the water?



The statement accompanying yesterday's full year results was certainly more positive than anything the company has said in a long time. Full year like-for-like sales may have fallen by 5 per cent, but that was no worse than already expected. Meanwhile, pre-tax profits rose by 13 per cent to £127.5m, while total group turnover rose by 5.1 per cent to £2.31bn.



Like-for-like sales in the first seven weeks of the current year are encouraging; up 2.1 per cent and the gross margin is heading in the right direction. The store refit programme appears to be delivering results and the subsequent increase in floor space should continue to deliver sales growth.



So on the face of it, things could be an awful lot worse but this silver lining does still come with a handful of clouds. There is still a huge amount of dent on the books, over £1bn which only came down by £80m so although the shares trade on a cheap 8.3 times forecast 2008 earnings, on a sales to enterprise value the stock remains expensive.



The high street remains as tough a market as it has been at any time in the last decade, and in spite of its refit Debenhams still faces stiff competition, particularly from a resurgent Marks & Spencer and John Lewis. Given that the fallout from the summer's credit crisis is yet to fully play out, a recession cannot be counted out of the reckoning, in which case the environment is going to get much tougher.



That said, Debenhams looks like a solid recovery play. The dividend yield, at just under 6 per cent, is attractive and looks safe, while management has done the right thing by investing in new ranges and its stores – so another warning looks unlikely in the short term. This is not yet a safe investment and anyone taking a punt will need to be aware of the potential downside, but yesterday's news was encouraging and for higher risk investors now could be the time to take a punt.



Autonomy



Our view: Hold



Current price: 915p



Autonomy has defied the critics and given shareholders excellent returns – the best part of 1,000 per cent since the stock hit its nadir at the bottom of the markets back in March 2003. But with the shares trading on something like 50 times current year forecasts, it was not a surprise to see some profit taking on the back of yesterday's third quarter numbers.



Not that the numbers themselves were poor – far from it. A 57 per cent jump in profits to $24.9m, up from $15.9m in the same period of last year and a similar jump in revenues to $89.5m was an excellent return. The trouble is, the market was expecting it and when shares are priced to beat forecasts, as Autonomy's are, investors are often disappointed.



Last year's acquisition of US rival Verity has transformed Autonomy's fortunes, and its context-based search software is now practically the industry standard. Its software allows customers, ranging from the smallest companies to international conglomerates and government bodies, to search vast quantities of static data and the tighter regulatory environment has played straight into Autonomy's hands.



Looking ahead, Autonomy claims that the fallout from the sub-prime mortgage crisis is another opportunity. With litigation likely to grip the US mortgage industry companies will need to provide information based on email retrieval.



However, the shares are priced to perfection on more than 30 times forecast 2008 earnings, and any kind of slip up, however small, could see the shares come back down to earth with a bang. For long term buyers this remains an exciting growth prospect, but in the short term Autonomy should take a breather. Hold.



Solana Resources



Our view: Risky buy



Current price: 114p



In January Aim-listed Solana Resources looked dead in the water. A succession of questionable management decisions plus less than stellar newsflow from its oil and gas exploration activities left the shares languishing at under 40p, leaving shareholders with little hope of a turnaround and nursing some ugly losses.



Nine months down the line, the company has engineered what looks like an impressive reversal of fortune. Starting from the top, the board shook up senior management, bringing oil and gas veterans Scott Price and Glenn Van Doorne on board. A strategic review led to the sale of some assets in which Solana had expensive commitments, refocusing its remaining resources on a smaller number of near-term prospects.



The end result has been a major re-rating of the shares on top of a sea change in the quality of its newsflow. A number of finds in its Colombian projects have moved into the final stages of development and production has trebled since January to 1,450 barrels of oil equivalent per day. Yesterday's positive test results at the Tres Curvas prospect add potentially another 300 barrels per day.



Giving the company any accurate valuation is hard given the lack of numbers to go on and investors should also be aware of the political risk involved in doing business in Colombia. But there could be more to play for here, and with more good newsflow, respected management and conservative reserve estimates, Solana looks worth a punt.

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