The Investment Column: Northgate Information Solutions has a lot to prove

Our view: Hold

Share price: 82.5p (-5p)

Chris Stone, the chief executive of Northgate Information Solutions, has taken a big step toward fulfilling his ambition to turn the outsourcing firm into the world's largest payroll processing company. Northgate has offered £257m to buy the Belgian human resources services provider Arinso after striking a deal to purchase a 60 per cent stake from the company's founder.

Arinso is Northgate's largest ever acquisition, taking the Hemel Hempstead-based business into 40 new territories. However, the deal represents a sea-change in the company's strategy in that Arinso resells software from the industry heavyweight SAP whilst Northgate offers its customers its own ResourceLink software.

Mr Stone explains that, while Northgate has built a solid position in the UK, offering its own software, large global customers are completely reliant on SAP. Thus, combining the two sub-scale companies will allow Northgate to take a two-tier approach, targeting large customers with SAP-based services while offering smaller customers ResourceLink.

With the company now the third-largest provider of payroll services in the world, management focus will likely rest on its fast-growing human resources business. This has raised questions about Northgate's underperforming public sector division, with analysts speculating it could be sold off to raise funds to pay down debt. However, Mr Stone dismissed such talk, arguing the company has leveraged its lower-growth, cash generative, assets to invest in higher-growth areas.

Northgate has a great track record in improving the margins of acquired businesses. Its valuation of 16.5 times projected 2007 earnings leaves plenty of room for upside if the Arinso deal pays off. However, such a radical change in strategy leaves the company with a lot to prove. Until the first signs emerge that Northgate has successfully integrated the two businesses and started to capitalise on the increased scale of the company, the shares could remain under pressure. Hold.

M&C Saatchi

Our view: Buy

Share price: 168p (+0p)

Arguably the most famous names in British advertising have also been one of the best performing stocks in the small caps over the past six months, adding more than 45 per cent since November.

Although the name is slightly misleading, with only Maurice of the Saatchi brothers playing any role in the running of the company, M&C Saatchi has been one of the fastest growing agencies in the sector. That said, it is still only capitalised at just under £90m, so growth has either stalled or there is plenty left in the tank.

Monday's departure of Christine Walker from Walker Media, an agency in which Saatchi has a 75 per cent stake, was well flagged. As a result of her departure analysts expect the company to buy up the remaining 25 per cent of the agency it does not already own.

Saatchi has built a strong European presence in the past two years by investing £3m in offices in Paris, Berlin and Madrid. This investment should drive growth by offering clients a pan-European approach to advertising while retaining a creative edge, without forcing clients down a more corporate route.

M&C Saatchi trades on a forward earnings multiple of 14 times forecast 2008 earnings, but with top-line growth accelerating and investment in new offices likely to take a back seat over the next 12 months there is scope for upgrades.

The advertising industry is never shy of a deal, and, while investors should not buy any stock based on takeover hopes, more consolidation should not be written off. If Saatchi stays independent, expect to see its valuation move more into line with its peers, meaning the stock remains a buy.

St James's Place

Our view: Take profits

Share price: 469p (+8.75p)

The upmarket wealth manager St James's Place once again beat analyst forecasts yesterday, posting an impressive 41 per cent rise in first-quarter sales, and claiming it was on track to meet its full-year targets. Its shares have doubled over the past 18 months and are up more than 20 per cent since we tipped them in October. However, tougher times undoubtedly lie ahead.

The past year's strong sales have been driven by changes to the pensions regulations last April. However, the effects of these reforms are wearing off, and SJP will be facing tough comparisons when it comes to report the next four quarters of results.

Although another strong year of bonuses in the City, combined with good equity market performance, continues to assure that the high-net-worth savings market is relatively buoyant, conditions look set to harden over the coming year.

SJP is well positioned for the longer term, but now is the time for investors who have enjoyed the recent ride to bank some profits.

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