Stocks to watch in April
MP Evans and REA Holdings are two rapidly-expanding palm oil producers taking advantage of the growing prosperity of emerging markets in Asia.
Evans's businesses include palm oil plantations in Indonesia, beef cattle in Australia and property development in Malaysia. There are plans for rapid expansion of both the palm oil production and the cattle herd. The target for oil (used both as staple food and as a biofuel feedstock) is to raise production from 200,000 to 500,000 tonnes a year by 2015.
Analysts think this is setting the company's profits on a steady growth course with pre-tax returns for the year just ended expected to reach £26.3 million (£20.7 million in 2010).
The forecast consensus is for the group to make £34 million this year and £43 million next. That would bring the price/earnings multiple down to only 7.3. The shares, trading on the Alternative Investment Market (AIM) at 443.5p, look good value.
Equally intriguing is the growth story emerging at REA Holdings. REA has been around the South East Asian plantation business for more than a century and has now evolved into a highly profitable operation, with palm oil production from one large area of the East Kalimantan region of Indonesia running at over 600,000 tonnes a year. It has also acquired coal-mining concessions in the area and has ambitions for a large open-cast coal-mining development.
Profits for the year just ended are expected to rise from £32 million to £51 million, while pre-tax returns of £64.6 million appear on the cards for the current year. The shares, at 605p, sell on a very modest forward multiple of 5.3. Chairman Richard Robinow has a 30% stake, while funds run by Prudential and Artemis between them hold another 20%.
Gulfsands Petroleum's mix of oil interests in Iraq, Syria, Tunisia and in the Gulf of Mexico has inevitably meant that the shares are likely to continue to perform in a volatile manner for the foreseeable future.
But the company continues to deliver impressive results. The next bulletin should show profits up from £28.5 million to £49.6 million, with some analysts projecting profits of over £100 million in 2013.
With the stockmarket currently valuing the business at only just over £200 million, the prospective earnings multiple on the shares is a lowly 2.7.
We put Whitbread under the spotlight a year ago at 1,750p, but by August the shares had slithered down to 1,409p in the then-hostile climate for equities. But the shares bounced strongly last autumn, touching 1,700p at the end of October.
The market thinks the Olympics will be great for the company's range of hospitality brands (which include Premier Inns, Costa Coffee and Beefeater).
Profits should rise from £312 million for the year just ended to £335 million in the current year and £375 million for 2013/14. Such an outcome brings the forward-earnings multiple down to 10.9. Dividend yield should go up to 3.4%.
Heritage Oil's decision to focus exploration on unstable regions such as Iraq and Uganda has cost it dear. As high as 585p two years ago, the shares have recently dipped as low as 160p.
Losses are expected to tumble from £28 million to £17.5 million for 2011 after a doubling of oil revenues.
Those revenues are expected to double again this year with losses whittled down to around £8 million.
The contrast between Heritage and Ithaca Energy, another oil company we featured, couldn't be greater. Ithaca's low-risk approach - squeezing extra oil from mature North Sea fields - has attracted a takeover approach after the shares ran up from 90p in October to 187p recently.
Analysts now expect production to rise from around 5,000 barrels a day to over 20,000 by next year. Profits for the year just ended are expected to double to £49 million. The shares featured in this column a year ago were at 173.5p.
Tipped here at 56p on recovery hopes last year, the shares of restaurant chain Prezzo touched 71.5p in January. Profits of £16 million (£14 million) are on the cards for 2011. Brokers confidently predict they will hit £17.55 million this year and over £19 million next.
We focused on Faroe Petroleum shares a year ago just as they hit an all-time peak of 205p. Results for 2011 should be out at the end of March with the group expected to swing into profits for the first time with positive pre-tax returns of £26.1 million, compared with a loss of about £26 million.
Profits of over £50 million are forecast for the current year. Broker Panmure Gordon recently set a target price of 243p for the shares. Unfortunately, the price has been very volatile despite continued exploration success in the North Sea.
The shares sank to as low as 130p in October but have since recovered to 165p.
Shares in Game Group, Europe's leading retailer of computer games, have plunged from 67p to just 5.13p in the year since they featured here as having "considerable speculative attractions".
Unfortunately, the company fell victim to weak pre-Christmas consumer spending despite new product launches.
It now appears to be heading for losses in the order of £30 million compared with a £23 million profit last time, and may be forced to sell many of its non-UK stores.
Such a strategy might bring the group back to profit next year but in the current year losses are likely to persist.
Note: since this article went to press, Game has filed for administration.
Shares in specialist insurance broker Brightside singularly failed to perform in the past year. Mentioned here at 36p, they have slipped back to as low as 15.75p towards the end of January.
However, a reassuring statement insisting the group was in line for record results and increased earnings in the current year has comforted the market, sending the shares back over the 20p mark.
The merger of the North Sea assets of Petrofac with those of the Swedish group Lundin created EnQuest in 2010, the largest independent offshore oil explorer in the UK.
The group is mapping out a growth formula for itself by building interests in lower-risk developments. It has just become the operator of the recently discovered Kraken field and also has half a dozen other mature producing fields. With high oil prices these fields are generating healthy cashflows for the group.
Upcoming results should be spectacular with profits of £247 million on the cards compared with only £35 million last time. The analysts' consensus prediction for this year is for £255 million and £335 million in 2013. That would cut the price/earnings multiple to a modest 9.6.
The shares have been quite volatile since they came onto the market two years ago and hit a peak of 158.5p a year ago. They look excellent long-term value at current levels.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
This article was produced by our sister publication Money Observer
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.