The road to recovery

Clearly, good timing is essential. Move too early - as many did with both Cape and Lamprell - and the danger is that in searching for the final drops of value you run the risk of colliding with a last unseen profit-warning. Move too late, though, as some did with Thomas Cook (see box, below), and you will miss the boat. Some companies, such as Mothercare, have risen well ahead of unequivocal news that the business is genuinely fixed, while others, such as Raven Russia, have been on the road to recovery for years without anyone seeming to notice. That is always the problem. The biggest gains are available to the risk-taker who is willing to take a chance of being wrong.

That isn't the angle taken here, though. The following 10 shares have all produced solid evidence of improved prospects. Admittedly, some, such as Interior Service and Cape, have an enduring exposure to low-margin work, which doesn't give much of a cushion if progress is slower than expected, but none - not even break-up candidate Mecom - are over-burdened with debt.

LAMPRELL (LAM)

Five profit warnings from Dubai-based rig engineer Lamprell were enough to leave any investor feeling punch drunk, but, having already started to recover, the betting must be that this company, with $100m (£66m) still in cash and covenants on project bonds under renegotiation, will make further progress. Lamprell certainly lost its way last year, with costs of $70m from penalties caused by delays in supplying wind turbine installation vessels. The final slap in the face was a £2.4m Financial Services Authority fine for failing to update the market properly in early 2012. The new management team, having cleared the decks with provisions in the final results in March, is now set for break-even this year and a return to profits in 2014.

MECOM (MEC)

Struggling Dutch newspaper publisher Mecom is perhaps more of a break-up story than a recovery story. But from shareholders' perspective, at least those willing to take a little risk on the execution of the disposal strategy, that makes no difference. There should ultimately be plenty of hidden value in the shares, which are trading at bargain basement levels. Results for 2012, released on 22 March 2013, were in line with depressed expectations, although the outlook was disappointing. However, that isn't the real meat of the story. Disposals of €30m (£25m) for Dutch online automotive magazines and the group's Polish operations should help to ease gearing, and broker Numis Securities forecasts that 2013's debt will be a comfortable 1.6 times its Ebitda forecast. The shares trade on a prospective PE ratio of 5.1. But much inevitably depends on the progress of future disposals in Denmark and of the balance of the Dutch operations, so buyers would need to be patient.

NOVAE (NVA)

Lloyds insurer Novae has been struggling along for many years against better performing peers, but now there are some real signs of progress from a three-year programme to improve returns. Against a background of rising premiums in catastrophe insurance, the company has changed its business mix and taken a firm grip on capital and costs. The result has been that claims now eat up just 90.5 per cent of premiums, instead of 101.5 per cent last year, and a more than doubling in return on equity from 8 per cent two years ago to 17.6 per cent in 2012. Although the dividend yield isn't that mighty by the standards of the sector at 3.9 per cent, the financial streamlining of the group gives scope for the payout to continue rising.

CAPE (CIU)

Cape operates low-margin construction, maintenance and refurbishment services right across the global oil and gas industry, which makes it vulnerable to unexpected cost overruns in far-flung places from sources beyond its control. This was the main problem confronting Joe Oatley, the highly rated incoming chief executive who arrived halfway through a series of profit warnings in 2012. Mr Oatley has made some important changes, culminating in extensive and largely non-cash write-downs in the recent results. The shares have climbed back to half their 2011 peak, but there is more to go, especially on the outside chance that Mr Oatley will do what he did at specialist engineer Hamworthy, which was bought last year by Finland's Wartsila for a hefty £383m. In the meantime, there are improved and leaner operations, plenty of fresh business to go for and a maintained dividend of 14p, which equates to a yield of 4.4 per cent. The forward PE ratio is around nine, which isn't too pricey, either.

INTERIOR SERVICES (ISG)

Shop and office fitter Interior Services is in a similar position to Cape, stuck in an industry with perennially low margins, and like Cape has a broad international spread of businesses. Results last month revealed the wafer-thin operating margins - of just 0.4 per cent - that it gleaned from the UK construction division. Interior Services had been hard hit by the retrenchment of UK retailers, but has proved adept at finding new markets. The engineering services industry, call centres and data centres all provided plenty of work in an order book that is 80 per cent private sector, and growing fast overseas. There should also be an uplift in bank and financial sector work in the City of London, where 25-year leases inaugurated at the time of the Big Bang are coming up for renewal. Unlike most recovery stories, this company has net cash - and, with a twice-covered dividend yield a tad over 6 per cent, there is some safety and income built in.

AGA (AGA)

The chancellor's Budget boost to the housing market has its obvious housebuilding beneficiaries, but insofar as it improves transaction volumes it should help sales of Aga's heavyweight cookers. While sales last year were as leaden as its cast iron Rayburns and Agas, operating profits improved, and in future costs should be helped by a trading relationship with China's Vatti, which should push the company's brands into Far Eastern markets. The shares, which trade at 10 times forecast earnings, are already 50 per cent above their 12-month low, but with the pension deficit plugged until 2015 and a new marketing campaign in the spring, there could be some good smoke signals coming through in the year ahead.

MACFARLANE (MACF)

Focusing on faster-growing niches and cost-cutting is improving prospects at packaging minnow MacFarlane. Results for 2012 showed a 20 per cent pre-tax profit improvement despite sagging revenues. Stronger cash flow has allowed modest debt levels to be cut further and is underpinning a dividend yield of 5.5 per cent, which is covered two-and-a-half times by earnings. With stronger revenues in the US and over the internet eclipsing flat UK sales, there is a good element of operational gearing, too. Even though the shares have soared by 60 per cent since last summer, there is more to go for, especially when there is a bargain PE ratio of 7.5, based on broker Oriel Securities 2013 forecast.

RAVEN RUSSIA (RUS)

Investors in the ordinary shares of Raven Russia have had a pretty bleak time of it over the past five years as sentiment has remained resolutely sour on the 'R' part of the emerging Bric story. They might well have wished they had instead bought the fat-yielding and safer preference shares in the company, which have more than doubled since issue and still yield 8.22 per cent. Yet now, perhaps, ordinary shareholders are about to have their day in the wintry Russian sun. While the company has consistently made good progress building and letting warehouses to supply the Russian consumer, it is the improved net asset value calculation that has underpinned the recent rise in the shares. Expect the 25 per cent discount to this rising net asset value to narrow further, too. Recent results show huge progress on all fronts, and with a 5.6 per cent dividend yield to boot.

BP (BP.)

The uncertainties surrounding the UK's biggest oil company, as sticky as any oil spill, have become a little clearer in the past few days. BP is still bogged down in high-stakes litigation with US regulators over the Deepwater Horizon disaster, but the picture elsewhere is improving. Following the $12.5bn sale of a stake in Russia's Rosneft, BP has said it will spend $8bn buying back shares. Although some shareholders have argued for a special dividend instead, this move at least compensates for the fall in EPS that would otherwise occur from the $38m of asset sales since the Gulf of Mexico spill. The joint projects between BP and Rosneft in the Russian Arctic are no more than expected, but add some exploratory upside for a company that has consistently failed to add reserves, replacing only 75 per cent of oil pumped in the last quarter. While BP has narrowed its valuation gap with less-afflicted peers, those with patience should find there is still more upside and an improved solidity of dividends while waiting for it to arrive.

ITV (ITV)

With a near-doubling of the share price since June, it might look too late to buy into the ITV recovery story, but it really isn't. Results in February showed a 16 per cent rise in EPS, the third successive year of double-digit improvement, but the price response still leaves the forward PE ratio of 12 looking reasonable. Production income, particularly online and interactive revenues, rose by 26 per cent and there is undoubtedly more to come. With costs cuts, improved cash generation and a growing slab of net cash, there's operational gearing here aplenty, which should drop through to the bottom line even if the advertising market remains stagnant.

10 recovery stocks