2009 Review of North East company share prices

Dec 16 2009 by Iain Laing, The Journal

A YEAR of recession has undoubtedly taken its toll on the stock market but financial analyst VINAY BEDI finds some cause for comfort as he reviews the fortunes of listed North East companies.

THE end of 2008 represented a significant period of fear. We had just witnessed a serious stock market downturn following a very clear realisation of what the credit crunch really meant. This, not surprisingly, had impacted on share prices across the world. Those fears were heightened by still growing uncertainty about the state of our banks, while we had to accept that we were entering 2009 in the grip of a severe economic recession.

The desperate nature of the situation was being fully underlined by the loss of companies from the North Index including businesses such as Sunderland furniture store chain SCS and South Shields gift retailer Premier Direct. We hoped that there could be an injection not just of new companies on to the list but of confidence for better economic conditions.

Of course, when things look like they can’t get any worse and all hope has gone, invariably that is the time to buy. By the end of 2008 we were reporting that only two companies in our North Index, County Durham haulage and mining company Hargreaves and pharmaceuticals giant GlaxoSmithKline, which has more than 1,000 staff in the North East, had shown any sort of value increase over the 12-month period. Overall the index had suffered a staggering 49.7% price fall during 2008. The region’s investors were feeling battered and bruised and expectations for 2009 were sympathetically reflecting that feeling of negativity.

Yet it is remarkable to be able to report that the portfolio of regional companies actually recorded average increases in value in the year to November 30, 2009, of 15.3%. Not only have values actually increased, something that we would have been hugely grateful for 12 months ago, but the magnitude of those increases has been quite remarkable, albeit accepting that rises have come from very low bases.

However, the 15.3% increase in performances from North East regional stocks compares poorly with a 24.1% increase in the FTSE All Share Index over the same period. One shouldn’t be despondent about this underperformance. Much of the strength in the big indices performances over 2009 has come from recovery in the large stocks and sectors which had been badly hit during 2008. For example, we have seen large recoveries in both banking and mining sectors when such advances were deemed most unlikely a year ago.

Much of the North Index is made up of quoted companies which fall into the “smaller company” category. Of the list of companies quoted in the North Index, only five have market capitalisations greater than £1bn and indeed six are valued at less than £20m.

Invariably, in times of volatile markets it is the smaller quoted company which sees its performance fluctuate most rapidly, frequently exaggerating general market movements. Overall, and bearing in mind where we were 12 months ago, most investors would be quite happy with the 15.3% return that would have been achieved in holding an equally weighted basket of all the stocks in the North Index.

It is only right that we take the positives from our stocks’ performances and highlight in particular those companies which have performed very strongly. We have seen upwards share price performances from 21 of the companies in the 12 months to November 30, 2009. In particular we would highlight an outstanding reversal in fortunes from the housing sector, with Newcastle-based housebuilder Barratt Developments enjoying a 611% rise in its, admittedly, seriously depressed and subsequently rights issue re-funded market value from 12 months previously. Newcastle-based landlord and property company Grainger plc, which had also been severely hit by the anticipated downturn in the housing market, enjoyed a 191% increase in its market value.

Another spectacular recovery was seen from the country’s eighth biggest car dealership operator, Newcastle-based Vertu Motors. It was given a big boost from the strong recovery of the motor industry which had enjoyed a revival following the announcement of the Government’s scrappage scheme. Vertu’s market value increased by more than 430% over the 12 months, again benefiting from a successful share placing.

However, another strong performance in the North Index during the year turned out to be the excellent 226% achieved by South Shields medical kit developer Immunodiagnostic Systems. This performance is worthy of particular mention as it comes from a company whose value was not “severely” hit during the 2008 downturn and therefore was not enjoying the benefits of recovering from a very low base. Immunodiagnostics’ performance has been based largely on fundamental company growth.

On a less positive note we also have to highlight the fact that the actual number of companies on our list has dropped once again. During the year we have lost both Prudhoe-based BNS Telecoms and Newcastle-based developer Metnor who have chosen to delist. Naturally during such difficult economic conditions we have had no benefit from new companies wishing to join the quoted arena. It is the quantity of companies in our index that we very much hope will start to improve over the next 12 months, particularly as markets have commenced a period of stabilisation.

Thankfully, in assessing the longer-term picture, there remains an excellent range of companies still quoted on the North Index. We make no apologies for highlighting once again businesses such as Wearside transport giant Arriva, Tyneside housebuilder Bellway, Newcastle environmental services company eaga, Newcastle retail bakers Greggs and Hargreaves. This excludes much larger companies on our list, in particular Newcastle software company Sage and Northumbrian Water, while Amec and GlaxoSmithKline also remain strongly represented in the North East and continue to be considered two high-class businesses.

We have chosen not to dwell on the disappointing share price performances of the last year. Companies have had a great deal to contend with over the past 12 months and often it is better for them to concentrate on running their businesses than worrying about the share price. Suffice to say that businesses such as Arriva, Go-Ahead and van rental firm Northgate are all working extremely hard to maintain some semblance of progress during the current difficult economic climate.

Regardless of the stock market recovery that we have seen over the past nine months, the economic picture is still not showing any significant signs of strong recovery at this stage. Stock markets and market values will, therefore, continue to be volatile and holding direct equities will of course entail risks which all investors must be fully aware of. However, the opportunities are there for investors focusing on our local companies and we look forward to further positive performances from The Journal North Index during 2010.

Vinay Bedi is divisional director at Brewin Dolphin in Newcastle.

Brewin Dolphin is broker to eaga, Hargreaves Services, Immumodiagnostic Systems and Vertu Motors, and joint broker to Greggs and Sage.

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