Stocks to watch in January

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Few companies in the defence sector can match the impressive record of Chemring. It has made a range of acquisitions to become a broadly-based defence company with a network of operations around the globe.

Its product range, which includes radar systems to detect improvised explosive devices, puts the company at the forefront of the fight against terrorism.

Its track record has been hard to fault, with earnings per share growth averaging 50% between 2006 and 2009. Lately that growth has slowed and, against an unhelpful equity market background, its shares have slumped from a peak of 736.5p in March to present levels that are not much above the 52-week low of 485p.

The world has not become a noticeably more peaceful place during 2011, so Chemring is projected to continue to expand. Analysts reckon revenues could top the £1 billion mark this year - four times the level they were five years ago.

Profits for the year just ended are forecast to rise from £89 million to £149 million, while they might hit £174 million in the current year. That would bring the price/earnings multiple down to 7.4. That's a cautious rating, given Chemring's track record. There is a better case for the shares now than there was a year ago. The prospective yield is reasonably attractive at 3.1% and richly covered by earnings. Analysts at most broking firms that follow Chemring remain enthusiastic.


A much higher prospective yield of 5.3% is on offer at Safestore, the UK's largest self-storage outfit, with a network of 96 outlets across the UK as well as a sizeable operation in Paris. But this is hardly adequate compensation for the failure of Safestore shares to perform since the company gained a full listing back in 2007.

The £450 million price tag then compares with a market value today of just below the £200 million mark. The shares have fallen from 130p to 104.5p in the last year.

Half-year results - showing profits down from £6.68 million to just £970,000 - reflected a cut in valuations on Safestore's properties, although underlying cash profits from higher rentals and better occupancy showed a 6% improvement.

New chief executive Peter Gowers, who has come from the hotel trade, has his work cut out to convince investors of Safestore's healthy prospects. Profits for the full year are expected to come in at £22.3 million (£29 million in 2010) but could recover to £24 million in 2012.

One other encouraging factor is the underlying net worth of Safestore's property portfolio - recently put at 204.8p per share. Half a dozen brokers following the shares remain keen supporters.


Porvair has made some progress in the last year. The shares, valued at 77.5p back then, surged to 133.5p in the spring. But since the summer they have fallen foul of general market weakness and slipped back sharply.

On the trading front, chief executive Ben Stocks seems to be doing all the right things. Half-year results showed a 27% profit rise, while September's trading update indicated that better-than-expected results were on the cards for the full year and that debt levels had fallen.

The company is a world leader in its niche market at the hi-tech end of chemicals - supplying filtration equipment to a wide range of industries, from aerospace to pharmaceuticals. Despite its modest stockmarket value of just £37 million, its annual sales are about double that figure.

The year just ended should deliver profits of £4 million (£3.13 million last time) and brokers Peel Hunt believe profits approaching £5 million are on the cards for the current year. The prospective yield is 3.1% and the shares sell on 12.2 times prospective earnings.


Computer software outfit IDOX had a good first half with the rapid bedding-in of its McLaren Software acquisition. The group is expected to make profits for the year to October 2011 of around £10.5 million, compared with just under £5 million last time.

Brokers expect profits of close to £12 million this year as the benefits of further acquisitions work through. That could reduce the forward earnings multiple to less than 10 and, with a progressive dividend policy, boost the yield to 3.2%.

Despite the unhappy market background, the shares have made steady progress in the past year, rising from a low of 12.5p to 22.63p.

Spotlight on SThree

Recruitment group SThree (STHR) suffered heavily in the 2008-9 credit crunch. So the market is wary of it suffering a similar fate in another downturn. In 2009 profits fell from £54 million to just £8.9 million.

This time around, though, management has diversified away from information and communication technology, and expanded internationally to exploit economic growth hot spots.

So far at least, the company seems to be back on a growth track. Profits for the year just ended are expected to show a £10 million increase to £31.4 million, and the consensus forecast for the current year is for a further rise to £40.42 million.

The half-year bulletin in July featured a strong cash position - enough for the directors to feel able to pay out a special 11p-a-share dividend. The shares now yield a prospective 6.1% and sell on around 11.5 times prospective earnings.

This article was written for our sister website Money Observer