Brokers' Views – Fairfax

'Beating the bears'

09/03/2009

Broker Fairfax has armed clients with advice on how to go about ‘beating the bears’. Investors need to be ‘ultra selective’ and only choose stocks satisfying certain criteria: liquidity, visible repeat demand patterns, ultra strong balance sheets, cash generation, potential for well-covered, significant dividend growth and, finally, a proven management team to steer the company through troubled waters.

Select companies passing these tests include website domain name specialist Group NBT, which has built a ‘strong brand’ in a growing market. The broker forecasts good levels of cash flow from Group NBT for the current year to June and, based on a price-to-cash flow ratio of eight times (a discount to the sector average of 15), sets a 300p price target for shares recently swapping hands for 221.5p. Furthermore, ‘with dividend cover of seven times and increasing cash generation, there is scope for significant dividend growth going forwards.’

Healthy margins

Healthcare Locums deserves ‘a complete rerating’, trading on a bargain price-to-earnings ratio of sub-seven times and offering defensive and visible earnings in markets with ‘sustainable long-term growth drivers’. Fairfax also predicts that margins will ‘increase dramatically’ over the next two years as the business mix changes and the cost base lowers.

With similarly strong drivers, fully listed support services group Tribal is another buy, based on ‘solid earnings growth, a comfortable dividend and a strong balance sheet’. Offering ‘a degree of assurance’ since it derives 96 per cent of sales from the public sector, the current rating fails to do justice to a business offering ‘sustainable double-digit earnings growth’.