Highlights from this week’s Investors Chronicle

Buy: Development Securities (DSC)

With investment valuations set to improve as the economy recovers, further significant portfolio realisations can be expected, writes Jonas Crosland.

The real estate group’s shares have risen nearly 30 per cent over the past six months, but still trade at a 17 per cent discount to net asset value.

Shares in Development Securities rose 7 per cent after the property developer delivered a strong first-half performance that saw the previous half-year’s pre-tax loss of £700,000 turned into a profit of £8.1m. Much of the improvement reflected a £12.1m realisation gain from the disposal of its Paddington site in west London which generated a net gain of £6.4m. Accordingly, Peel Hunt has increased its full-year estimates on net asset value (NAV) by 1 per cent to 265p and adjusted earnings per share by 11 per cent to 9.3p.

Crucially, improving sentiment among investors in the property market helped valuations in the property portfolio to stabilise during the half-year period. Indeed, this contributed to a modest increase in the group’s adjusted NAV to 262p.

Following the property realisations, unrestricted cash rose from £48m at the start of the year to £53m. Further realisations, notably £10m from the Manchester Arena sale and possibly London’s Edgware Road development, could boost cash resources to about £80m or one-third of the market capitalisation, according to analysts at Peel Hunt.

New real estate opportunities include an £8.2m option agreement on a derelict office building in Southwark and two sites in Romford town centre, bought for £8.3m.

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Sell: Tracsis (TRCS)

Shares in Tracsis fell nearly 9 per cent on the back of recent figures, but the transport-focused software, technology and consultancy group did better than the headline figures suggest. Add back exceptional items, and adjusted cash profit rose 3 per cent year-on-year to £3.4m.

But adjust for the acquisition of traffic data collection specialist Sky High and turnover fell 12 per cent in the period to £7.64m. Much of that decline reflected an impasse in the rail franchise renewal process – meaning less consultancy work for preparing franchise bids. However, chief executive John McArthur points out that a revised timetable for future franchise bids has now been published.

Sales of the group’s core software – which helps to optimise crew rosters for train companies – rose nearly 8 per cent, helped by the launch of a new rolling stock tool, TRACS-RS. The group also secured the first sale of its FreightTRACS package.

Broker WH Ireland expects adjusted pre-tax profit of £3.4m for 2014, giving adjusted earnings per share of 11.2p (from £3.3m/11.2p).

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Hold: Whitbread (WTB)

A forward price-earnings ratio of 20 is pricey and the yield is nothing special, writes Julian Hofmann. But Whitbread is performing strongly and, as consumer sentiment continues to recover, it’s hard to see near-term catalysts that could seriously threaten that toppy share rating

Strong consumer appetite for coffee and budget hotels meant an impressive first-half performance for Whitbread. The group saw like-for-like sales jump 2.8 per cent year-on-year, with much of that growth generated at the group’s Premier Inn hotels and at its Costa Coffee chain.

Costa’s UK business enjoyed an especially robust first half after having brewed up a 5.5 per cent increase in like-for-like sales – that helped the division to boost underlying profits by 20.5 per cent in the period to £43.5m. The performance was complemented by the Premier Inn business, where total occupancy grew 1.3 percentage points to 80.3 per cent and like-for-like sales rose 3.3 per cent.

The company currently has 53,039 UK hotel rooms and is within sight of its targeted 65,000 by 2016. However, there was a marked contrast in performance at the weather-affected restaurants division, which boasts such brands as Beefeater Grill. Underlying sales there were flat and ongoing cost pressures – mainly larger food and wage bills – also took their toll. Still, even here total divisional sales rose 2.9 per cent to £270m.

Broker Investec Securities expects pre-tax profit of £405.2m for 2014, giving adjusted EPS of 170.9p (from £356.5m and 149.2p in 2013).

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Sector focus: recruitment

Recruiters have been a smart place to put your money over the past 12 months as they have raced ahead of the wider market on hopes of a cyclical upswing, writes Kirsty Green . The question investors must ask now is are those hopes realistic, and even if they are, is it too late to join the party?

Party on, says Numis Securities. The broker believes that confidence has returned to the staffing market and the focus will now switch to just how high earnings can go in an upswing. A return to peak productivity will lead to significant earnings upside, it believes, and valuing the recruiters on these potential peak cycle earnings implies further share price gains.

Recruitment is incredibly cyclical. It bombed out in 2009 as hiring in the UK and Europe ground to a halt, and the current excitement stems from signs that those areas are recovering. According to the latest survey by the Recruitment and Employment Confederation and KPMG, job vacancies in September grew at a similar pace to August, which was the fastest for over six years.

The recent trading update from Hays , whose geographic spread makes it a good bellwether, gave credence to this more encouraging backdrop. Some of the smaller, niche players have also cheered the market recently. Blue-collar recruiter Staffline’s first-half earnings per share rose 35 per cent, and Matchtech , which specialises in hiring engineers, has just reported a 28 per cent jump in full-year operating profit.

It hasn’t been quite so upbeat for everyone. Michael Page grew UK net fee income by 5 per cent in the third quarter but management has warned that it only expects to make a full-year operating profit of £68m, almost £3m less than it predicted back in August. Recruiters with a technology sector focus also hit a soft spot this year. Profit fell at SThree , Harvey Nash and Aim-listed Networkers International during the first half, although all three have since indicated that the outlook is improving.

Bears point to the fragility of the global economic recovery, and risks arising from structural changes in the recruitment market. Networking sites such as LinkedIn and job boards such as totaljobs.com allow candidates and companies to cut out the middleman. But every recruiter has comfortably outperformed the FTSE All-Share over the last 12 months and the three most expensive stocks based on forward earnings multiples – Robert Walters, Michael Page and SThree – are also the three with the highest forecast compound earnings growth.

Investors should not assume that a rising tide will lift all boats. They must consider who is best placed to meet those earnings expectations and who can still offer some valuation upside or yield protection – earnings disappointment will spell huge trouble.