Avanti Communications (AVN)
Satellite broadband provider Avanti Communications has seen its shares lose 40 per cent of their value since hitting a 12-month high of 735p last December. The company's disclosures and definitions have been coming under increased scrutiny now that Hylas 1 – its first satellite – is finally in orbit. Analysts, such as those at Investec, have questioned the definition of Avanti's "pre sales" metric; having pre-sold 25 per cent of Hylas 1 capacity last summer, the group is now choosing not to disclose the metric. They also question Avanti's £229m order book. Equally alarming is the 2,300p price target set by house brokers Cenkos based on the net present value of Hylas 1, 2 and 3. Hylas 2 is not due for launch until 2012 and Hylas 3 remains on the drawing board.
Ditching such a popular retail stock is brave but we feel that much of the heat that kept Avanti in orbit has come out of the shares and prospects for a significant rebound are limited. We also question the long-term need for satellite in an increasingly land-based wireless world.
Carpetright (CPR)
Carpetright's shares have held pretty steady in recent months and still trade on a forecast PE ratio of 32 times, well in excess of the retail sector average of 10. That's partly because they're still tightly held by chief executive Lord Harris of Peckham, who owns around a fifth of the company he founded in 1988. The possibility remains that he will take the carpet retailer private, having already tried and failed in 2007.
But underlying trading remains extremely weak – in its latest quarterly update, like-for-like sales slid 7.7 per cent, and profits are likely to be less than a third of their 2008 peak of £62m. February's profit warning was partly caused by snow, but also Carpetright's exposure to the weak housing market. Its sales are tightly correlated to mortgage approvals, which fell to a 23-month low in December. Carpetright's customers are also among the demographic most likely to be hit hardest by spending cuts. Of the 12 analysts covering Carpetright, 11 rate its shares a sell, including Nick Bubb of Arden Partners, who describes the shares as "absurdly overvalued".
CRH (CRH)
As the world's second largest maker and distributor of building materials, CRH is well placed to take advantage of an improvement in economic conditions. In fact, the declining trend in sales slowed towards the end of last year, while sales so far this year are ahead of the same period in 2010.
But last year's numbers were badly affected by the poor weather, and there is little to suggest the slowing decline in sales will be replaced any time soon by a return to meaningful growth. To its credit, CRH has maintained cash flow and reduced debt, helped along the way by asset disposals, although impairment charges increased last year to €124m (£107m). The group still managed to make a number of bolt-on acquisitions, which cost €567m, and these could prove useful when the better times return. But the near-term outlook remains bleak. The dividend payout hasn't really moved for a couple of years, and the shares are rated on 18 times forecast earnings. So, until there are signs of a sustained economic upturn, the shares, and the company, look set to bump along the bottom.
CSR (CSR)
CSR was just starting to shape up; trying to get back into mobile handsets, anticipating a return to profitability. But then it agreed to merge with Zoran, a lossmaking consumer electronics company that operates mainly in the digital camera and printing markets – two maturing areas. In fact, Zoran was so troubled, that there was a shareholder revolt to oust its board just weeks before the deal was announced. CSR says the deal will help it focus on the consumer electronics segment. That suggests that handsets are no longer an area of core focus – even though handset growth has been fuelling growth in rivals ARM and Imagination Technology, thanks to the success of products like Apple's iPhone and iPad. CSR's largest handset client is Nokia, which has significant troubles of its own.
Zoran's integration will be tough, and CSR will have to ensure synergies outweigh the negatives of Zoran's maturing market. Moreover, if image processing was so exciting why didn't Intel or others look at buying Zoran? After issuing two cautions to the market last year, CSR is not in a position to make such a risky deal.
Desire Petroleum (DES)
Falkland Islands oil explorer Desire Petroleum suffered a dismal Christmas period when first the Jacinta prospect targeted by its most recent well failed to find hydrocarbons and several days later the overlapping primary Dawn prospect also came in dry. That now leaves the company in the perilous position of having enough funds to drill just one more well – the last of the planned six – and pay for outstanding seismic survey work and the return of the drilling rig.
Of course, Desire needs just one strike to transform its fortunes completely, but previous results don't inspire much confidence. If the sixth well also fails, further drilling will require a fund-raising that's unlikely to be met with the same fervour as previous cash calls.
With Rockhopper's Sea Lion looking increasingly isolated as the only discovery in the North Falkland basin, now would be a good time for oil exploration investors to switch focus to the South Falkland basin. This has even larger targets than Sea Lion and is where Borders & Southern and BHP Billiton/Falkland Oil & Gas plan to begin exploration late this year.
Game Group (GMG)
Video games may be big business, but that doesn't mean rosy prospects for specialist retailers like Game Group. Just as gaming has gone mainstream, so has gaming retail – most major titles can now be picked up in supermarkets or through non-specialist online retailers such as Amazon. So Game has had to sacrifice margin to keep customers coming through the doors of its 1,300 stores across Europe, at a time when hardware sales are falling. The so-called console cycle has been in a steady downtrend – apart from the Nintendo 3DS, no new platforms are expected for some time, so there are few catalysts for an upswing.
These structural trends have already proved too much for one chief executive, Lisa Morgan, who suddenly quit in April 2010. Ms Morgan's replacement, Ian Shepherd, has steadied the ship, outlining plans to close stores and improve its position online. But Game's pricing is not always particularly competitive. The shift to digital downloadable content also presents a challenge to Game, which currently has just 1 per cent of that market. The transition to digital products that has left HMV on the brink could be repeated at Game.
Hansen Transmissions (HSN)
As a manufacturer of gearboxes for wind turbines, Hansen should be well placed as renewable energy spending booms. But Hansen's problem is its legacy as a European industrial operation in a market that is becoming increasingly commoditised and dominated by low cost manufacturers from the Far East – where much of the new growth in wind power installations is likely to occur. Hansen has responded by slashing costs in its EU operations, paying down its hefty debts, selling off non-core operations and investing in production facilities in China and India. But the time lag of the credit crunch hit the global wind market in 2010 as market growth stalled and, according to analysts from Peel Hunt, Hansen's capacity utilisation is currently running at just 51 per cent and price increases are likely to be muted.
Southern Cross (SCHE)
The embattled care home provider recently appointed a restructuring specialist, Tim Bolot, to the board to try to negotiate the fine line between the firm's banks, who are owed around £45m, and a disparate collection of landlords. The landlords, some of whom are themselves in difficulty, hold the keys to its homes and benefit from guaranteed annual increases in rent, despite the fact Southern Cross's fees from local authorities continue to tumble as government spending is squeezed. This slightly crazy situation was bequeathed by its private equity owner, Blackstone, which sold off its home stock at a profit at the height of the property boom in 2006. Management may be able to turn the situation around, but that is hard to do when a business has no assets other than the service it offers, for which increasingly few local authorities are prepared to pay a competitive rate.
Yell (YELL)
Yell's biggest problem is that producing paper directories in the internet age just doesn't look like a plausible long-term strategy – an issue compounded by grim recession-induced trading in recent years and a truly monstrous debt pile.
Indeed, with its half-year figures in November, Yell's UK unit saw revenues slide 14 per cent, while revenues slumped 12 per cent in the US. The Spanish and Latin American division has been hit particularly hard by the severity of the recession in Spain – revenues there collapsed 16 per cent at the half-year point. And, with a £2.8bn debt pile dwarfing the group's £142m market value, it's hard to avoid the conclusion that further fund-raisings are virtually unavoidable. Admittedly, the group does have an online offering where revenues rose 10 per cent year on year at the half-year stage. But that accounts for just a quarter of total revenues and just won't grow fast enough to compensate for the heavy declines everywhere else.
