Recession beaters

Global economies have been hit by the credit crisis, which began with sub-prime mortgage problems in the US, leading to growth forecast downgrades across the board – the International Monetary Fund (IMF) has sharply downgraded its global growth forecast for 2008.

Furthermore, in a recent poll of economists, 42 of 58 believed the US, the world’s largest economy, was already in recession, despite the Federal Reserve’s wave of interest rate cuts since September. And given the old adage ‘when America sneezes, the whole world catches cold’, UK investors have every right to be worried.

Economic growth on this side of the Pond is expected to slow even more this year, even after recent rate cuts, and the dreaded ‘R’ word hangs on many commentators’ lips. Yet the chances of a full-blown recession, defined by most economists as two consecutive quarters of contracting GDP, remain relatively low. As Global Insight economist Howard Archer opines, ‘We expect the UK to avoid recession, but to see an extended period of below-trend growth.’

Shock absorbers
With the full impact on corporate profits yet to be fully understood, the most prudent policy for investors is to ensure portfolios contain companies with insulation from slowdown. Resilience can spring from a variety of sources, including a presence in non-cyclical sectors, high levels of forward visibility from long-term order books, exposure to regulated sectors or simply the sheer diversity of a business.

A perfect example is specialist rental business Vp, guided by managing director Neil Stothard and with a formidable recent track record of shareholder returns. This consistent performer offers investors exposure to a defensive spread of markets, ranging from construction and civil engineering (where regulatory drivers in water represent a huge investment plus) to rail, where work rumbles on in fair weather or foul, to the buoyant oil and gas sector.

‘We offer exposure to regulated, non-GDP driven markets that are not affected by the credit crunch, as well as GDP-driven markets,’ assures Stothard, keen to flag up the group’s good organic growth track record and ability to complete strategically compelling deals for cash. Based on forecasts for the full year to March 2008 – profits of £19 million and 30.4p of earnings – the 330p shares, which have drifted back from 440p last year, command a rerating.

Overseas drivers
Similarly diverse, with appealing overseas prospects, is Driver Group, provider of commercial and dispute resolution services to the construction industry.

Thriving in the UK, particularly in London and the South East, where activity is forecast to remain strong in the run-up to the Olympics, Driver also offers exposure to the buoyant construction markets of the Middle East. While the business isn’t immune from downturn, its services, including claims preparation, negotiation and settlement as well as the commercial management of construction projects and risk analysis, should remain in demand even if belts tighten.

Moreover, Driver boasts a good spread of clients – no single one accounts for more than ten to 12 per cent – across different construction sub-sectors and some 80 per cent of its work is repeat business with large contractors, giving great visibility. Floated on AIM in 2005 at 73p, the shares have fallen back to original placing levels on fears of the effects of the credit crunch on capital project spend. But we feel Driver’s defensive qualities are as yet not fully understood by the market – based on September 2009 forecast profits of £2.95 million and earnings of 7.98p, the shares offer earnings resilience at a budget price.

Cape – one for all weathers
Also offering overseas growth appeal and some way off recent share price highs is Cape, whose prospects are tied to the inexorable global demand for energy. Its mining, petrochemical and oil and gas clients in the Gulf, Far East and ‘Pacific Rim’ need to extend the life of assets such as oil rigs; and the company is also benefiting from the trend to outsource non-core services such as fire protection, insulation and specialist cleaning to sizeable, safe, proven suppliers such as Cape.

Back in March, the Martin May-led group, sitting on a very substantial order book, unveiled outstanding 2007 results. Profit before tax gushed more than 110 per cent higher to £33 million, on turnover increased to £429 million (2006: £274 million). Having delivered substantial growth in sales, underlying profits and earnings over the past four consecutive years, the shares, trading on only 8.8 times forecast earnings of 27.7p, should be on your radar.

Order book resilience
Growth Company Investor has oft touted the attractions of companies whose earnings are linked to non-cyclical, essential spend in maintenance-related or regulated markets, or which offer visibility through bumper order books.

Boasting many or all of these qualities are the likes of Mears and Rok, May Gurney (rail, highways, utilities, waste recycling) and Redhall (services related to new-build and decommissioning in the nuclear sector).

Understandably out of favour but worth adding to the list is restructured construction and engineering group Costain, which recently announced an emphatic turnaround for 2007 and has returned to the dividend list for the first time in 17 years. Last year, losses of £62 million were turned round to profits of £19.8 million, enabling chief executive Andrew Wyllie to declare a 0.5p dividend.

Costain, whose diverse operations span civil engineering and building and whose recent high-profile projects have included the new Eurostar Terminus at St Pancras in London, is honing its focus on spending programmes in the water, highways and nuclear sectors. Further resilience is being built in via the targeting of blue-chip customers ranging from Tesco to Thames Water, who are increasingly looking to partner with Costain on long-term deals. Cash rich following a recent £60 million rights issue and set to deliver 2008 profits and earnings of £23.8 million and 2.9p respectively, the shares have strong recovery potential.

Robust recruiters
We detail the recession-beating characteristics of technical staffing group Morson, this month’s Company Profile pick, on page 10. But other players in the broader recruitment and staffing space, the recent whipping boy of the stock market, offer surprisingly robust characteristics.

These include the oversold Hexagon Human Capital, whose diverse senior interim management and executive search operations should flourish in downturn as well as upturn, since companies need to draft in top-level executives able to drive through change and cut corporate fat when times are tough. The strong strategic positioning, broad portfolio of services and diverse geographic spread of Harvey Nash stand it in good stead. Despite delivering a 30 per cent plus profits advance for the year to January and hiking the total dividend to 1.8p (1p), the shares trade on an unduly miserly forward multiple of 4.4 times. This is based upon strong forecast growth in profits from £7.6 million to £9.5 million this year, with earnings set to burgeon to 9.1p (7.3p).

Steer clear of a crash
Two acquisitive, cash-generative and dividend-paying counters operating in the UK’s £6 billion collision repair industry might be at the forefront of your thoughts. Nationwide Accident Repair Services offers resilient earnings growth in this fragmented market, currently consolidating both in terms of corporate players and customer preference, with insurance clients choosing to work with large players such as Nationwide and number two player Just Car Clinics.

Nationwide recently reported a record 2007, in which profits and dividends were increased by 15 per cent. For 2008, analysts are looking for pre-tax profit acceleration to £7.95 million (2007: £6.8 million), earnings of 12.8p and a 4.7p dividend, placing the shares on an undemanding multiple of 9.9 with a prospective yield of almost four per cent. While no company can claim to be entirely recession proof, Nationwide will remain a non-cyclical investment so long as accidents continue to occur on the roads.

Likewise, Just Car Clinics delighted its backers with news of a record year to December. Profits motored 34 per cent higher to almost £1.2 million, thanks to performance improvements from established sites and from acquired ‘body shops’.

Chief executive Barry Whittles is looking to acquire further sites, with JCC still only speaking for less than one per cent of the market. Based on estimated 2008 profits and earnings of £1.3 million and 6.2p, JCC also offers inexpensive resilience, trading on only 10.9 times forward earnings.

RWS’s patent protection
Analysts’ favourite RWS Holdings offers exposure to strong market positioning in the growing, yet highly defensive, patent translations market, driven by patent filings across the globe. Its shares peaked at 375p in February, although analysts have set a 407p target price and a pullback to 342.5p offers investors a terrific buying window.

Led by executive chairman Andrew Brode, the highly cash-generative company is Europe’s leading provider of intellectual property support services and high-level technical, legal and financial translation services. Its core patent translation business is thought to be the biggest of its ilk in the world, translating more than 50,000 patents and IP-related documents every year, while serving a wide range of blue-chip clients from Europe, North America and Japan, across a diverse range of sectors including pharmaceuticals, defence, automotive and aerospace.

RWS recently cheered investors with a bullish trading update, flagging up the fact that growth in sales and pre-tax profits for the six months to March ‘will continue the dynamic upward trend seen in all periods since flotation’ by way of a reversal in 2003.

Hungry for acquisitions, RWS, which boasts formidable acquisitive firepower in its £17 million of net cash, should continue to enjoy high levels of demand for its services from new and existing customers alike during the uncertain times ahead. ‘At a time when the economic climate is more challenging than for some years,’ Brode recently opined, RWS is ‘very well positioned to continue to grow its share of the highly defensive intellectual property translation and services market.’ Based on a substantial forecast profits push for the year to September, from £11.1 million to £14.2 million and in earnings from 20.1p to 23.4p, the shares trade on a prospective price-to-earnings ratio of less than 15 times and offer a strongly underpinned yield of around three per cent.