Highlights from this week’s Investors Chronicle

Buy: Development Securities (DSC)

The shares look seriously undervalued at a 43 per cent discount to book value, which takes no account of the expected 80p of development gains

A mixed-use development in Greenwich, a Morrisons supermarket in Littlehampton and an office-to-housing conversion in Westminster helped push Development Securities back into the black for the year to February 28, writes Stephen Wilmot.

These and other projects generated gains on disposal of £28.1m, marking the first wave of profits from the equity raised back in 2009 and 2010.

Sadly, those gains were substantially offset by writedowns on the company’s portfolio of investment assets. Like other developers, DevSec owns a portfolio of high-yielding regional offices and shops to cover its everyday expenses. It produced net income of £12.8m over the period, but lost the same amount in value in a thin market dominated by forced sellers.

Chief executive Michael Marx is notably downbeat about market prospects and says he “wouldn’t be surprised” if regional valuations continued to fall for another year. At the same time, he expects the company’s 40 development projects to generate profits of about £97m, or 80p a share, over the next three years. DevSec has also branched into a new area by acquiring two property-loan portfolios, together worth £143m.

Brokerage Peel Hunt expects adjusted net asset value of 262p at the year-end (from 260p in February 2013).

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Sell: Sage (SGE)

Sage is valued at 16 times forward earnings, which looks too rich given the weak European environment and the difficulty in generating any meaningful profit growth

Accounting software specialist Sage is doing its best to persuade shareholders to sit out the weakness currently afflicting its European operations by offering a £200m special dividend, worth 17p a share, writes Julian Hofmann.

The ongoing largesse has kept the share price firm during a period of transition, which involves the company adapting its PC-based payroll and payment products to the demands of cloud computing.

Sage’s underlying performance was solid rather than spectacular and, after stripping out the effects of a £196m impairment charge for discontinued products and assets held for sale, cash profits rose by 7 per cent on organic revenues up 3 per cent. Europe was still the main cause for concern. Problems in Spain, France and now Germany crimped the momentum achieved in the UK and Ireland.

Trading in the smaller Americas segment was far more positive, with an improving US economy leading the way. Revenues and profits were both up by 15 per cent, buoyed by increased cross-selling, higher recurring revenues and improved margins as more customers moved to higher-priced products on renewal.

Investec forecasts full-year underlying pre-tax profits of £362m and earnings per share of 21p, up from £356m and 19.7p in 2012.

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Hold: J Sainsbury (SBRY)

Sainsbury’s is growing market share and diversifying, but the shares have had a good run and now trade at a premium to Tesco and Wm Morrison

Full-year results at the supermarket group were largely in line with expectations, but news that the group is to take full control of its retail bank by acquiring Lloyds’ 50 per cent stake in the joint venture for £248m was significant, writes Julia Bradshaw.

It’s central to Sainsbury’s strategic aim of diversifying away from the highly competitive and low-margin groceries business, and full ownership of the bank will also give the group more information about its customers. The bank is also profitable – Sainsbury’s share of post-tax profit rose 38 per cent to £22m, the fifth consecutive year of profit growth.

Like-for-like sales, excluding fuel, grew 1.8 per cent – below management’s medium-term objective of 3-4 per cent, but 1.2 percentage points ahead of the market and in tough conditions. Underlying group pre-tax profit, meanwhile, increased 6.2 per cent to £756m. Cost savings of more than £100m helped to offset higher inflation.

Capital spending fell by £200m to £1.04bn and much of next year’s investment is earmarked for expanding the convenience channel, where sales grew 17 per cent.

Broker Shore Capital expects adjusted pre-tax profit of £804m for 2014, giving adjusted earnings per share of 33.3p (30.7p in 2013).

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Sector focus: support services

The outsourcing sector has thrashed the wider market over the past 12 months after investors latched on to its excellent revenue visibility, dividend growth and cash generation, writes John Ficenec.

While the FTSE 100 has risen 15 per cent in a year, the FTSE support services sub-sector has surged by 36 per cent since May 2012.

The big names continue to offer strong defensive characteristics and debt is down across the sector. However, the latest round of results revealed growing pressure on profit margins and increased cash flow demands, as government contracts ask outsourcers to do more with less in order to meet austerity targets. Outsourcing has become far more competitive, too, and the contracts are being awarded lower returns and are more capital-intensive.

For instance, G4S shares slumped after it admitted margins had slipped 60 basis points in the first quarter, with further weakness expected in the year ahead. G4S is not alone in feeling the pinch and companies are having to look further afield for growth. A recent joint venture contract announced by Capita and Staffordshire County Council to deliver support services to schools is another example; the contract is worth £85m a year in revenue and, while there is little detail on the operating margin, it’s unlikely to match the high double digits earned in the private sector.

Having delivered years of growth and returns for shareholders, Mitie is also migrating into new business areas to try to deliver the level of growth the market has come to expect. The acquisition of domiciliary care provider Enara for £111m takes Mitie away from its core business of looking after buildings, and into looking after people. That raises risks; broker Peel Hunt, for example, fears they may have overpaid for a company that was itself a collection of private equity deals. And there is the increased operational risk of integrating a business in which Mitie has little experience.

Mears , historically a provider of maintenance services for social housing clients, has also branched out into new markets with the £22.5m deal for homecare provider ILS. However, providing nursing care is a long way from fixing boilers and fitting double glazing and, like Mitie, Mears is finding its core markets increasingly tough. So far, it has benefited by taking out struggling competitors like Morrison, but even that deal is proving hard to digest.

Among the other providers in a diverse sector, we like Serco – the move to a higher payout ratio may signal that the days of revenue growth are slowing, but we like its ability to win contracts and excellent dividend track record.

Babcock remains a solid operator, too, with the advantage of providing services that require national security clearance. We think competition will be less fierce for the refit of nuclear submarines, so margins should be more insulated.

For more coverage, see www.investorschronicle.co.uk