Stocks to watch in February
Precious few FTSE 100 shares showed investors a decent profit in 2011 - a year most followers of equities will probably prefer to forget. But microchip designer ARM emerges with flying colours as the best performer of all leading UK shares.
In 2010, we gave ARM top billing, although most analysts were cautious and the rating was then a disparaging 6.02. Indeed, only one lonely analyst (out of 22) rated them a ‘strong buy'. This is further proof, if any were needed, that in investment it often pays to bet against the crowd. ARM started 2011 at 400p and quickly shot up to more than 600p by mid-February. Against a gloomy background, the shares hit a peak of 651p in early November.
The company's low-energy chip designs and technology have come to dominate the mobile phone and tablet market. Full-year figures are expected to show profits up from £110 million to £182 million.
Analysts expect a further rise to £234 million in 2012. Even so, the shares now sell on a rarified 45 times expected earnings for this year. Any slip in the growth performance and the shares will be vulnerable. Ironically, more analysts now like the stock, although the rating is still a restrained 4.72.
The contrast with the performance of fellow microchip designer Wolfson Microelectronics could hardly be more marked. The shares, as high as 312p in February 2010, now languish just above their low of 96p.
While the company is in all the right growth areas of smartphones, e-books and tablet PCs, these products are cannibalising traditional PC sales. Wolfson is still not profitable and dividends for shareholders seem a distant dream.
When this column featured the shares a year ago at 236.5p, they had already doubled in anticipation of a return to profi ts in 2011. This is not going to happen. In his November trading statement, chief executive Mike Hickey had to report increased operating losses of $10 million (£6.37 million) for the third quarter.
Overall, the market thinks full-year pre-tax losses will be down from £7.1 million to £4.2 million and the current year might see a small profit. Broker Peel Hunt recently put the shares back on its ‘buy' list at a target price of 135p. But the rating remains a cautious 4.52 – hardly surprising given the forward price/ earnings multiple of 58.8.
AFRICAN BARRICK GOLD
A year ago we shone a spotlight on African Barrick Gold shares. Given the unhelpful market background, they have at least had the merit of not losing investors much money.
They are down from 530p to just below 500p and were as high as 618.5p in mid- September. Still 70 per cent owned by its giant Canadian parent, African Barrick focuses on gold mining in Tanzania, where it appears to already have enough reserves for 20 years of production. Operating in a politically unstable area has its risks, as was amply demonstrated in 2011, when the company's North Mara mine became a battlefield between intruders and local armed police.
Naturally, chief executive Greg Hawkins is now seeking to ‘diversify country risk'. The other risk is that the gold price will stop heading north. Meanwhile, the market thinks profits for 2011 will soar from £197 million to £280 million, and in 2012 could hit £438 million – reducing the forward earnings multiple to just 6.7. Dividends are also expected to rise rapidly, although the prospective yield on the shares is a modest 1.3 per cent.
There is a lot of broker support for shares in Informa, the specialist business publisher, ahead of its next results. These are expected to show a dramatic rise in pre-tax profits from £125 million to £270 million, and analysts are already suggesting profits will top £320 million in the current year.
So what has prompted this rose-tinted view of prospects? Chief executive Peter Rigby's update in October indicated that the entire range of its operations – books, magazines, newsletters, training and exhibitions – were continuing to grow against a tough trading background in its sector.
The resilience of the business explains why a clutch of brokers are Informa enthusiasts. Panmure Gordon recently set a target price of 545p for the shares – nearly 200p above current levels. A progressive dividend policy means the shares now yield a prospective 4.5 per cent, covered more than twice by earnings.
Smaller companies with speculative appeal
The sudden death in November of chief executive Harry Michael coupled with renewed political unrest in Egypt has again cast a shadow over the shares of gold miner Centamin Egypt. Centamin has developed the country’s first modern mine: the Sukari project in the eastern desert close to the Red Sea. At present, production is running at 200,000 ounces a year.
Originally the target was at least 250,000 ounces, but regime change meant restrictions on supplies of blasting products for a while. There are plans to raise output to 500,000 ounces over the next three years.
Production costs are estimated at $550 an ounce while the current gold price is nearly three times that level. After peaking at 182p in December 2010, the shares drifted down. They recently fell as low as 82p. Whatever the operational difficulties for the company, the immediate prospect is for a huge jump in profits from £20 million to £120 million for 2011 while brokers have pencilled in £172 million for 2012. With earnings per share of 16.12p in prospect, the shares – recently priced at 99p – sell on only 6.1 times earnings.
Greka Drilling floated on AIM in March, spun out of Green Dragon Gas, which retains a 68 per cent stake. Greka uses unconventional drilling techniques to drill for gas in China. At present, most of its work is for its Green Dragon parent, but there are plans to win contracts for other coal-bed methane (CBM) gas producers in China and other areas of South East Asia. The potential looks enormous, as experts believe 30 per cent of China’s gas production will be via CBM by the end of this decade.
Meanwhile, Greka is rapidly building its fleet of rigs. It currently has 12, but by spring it should have 32. Profits are expected to grow exponentially. Upcoming results released in Februaryshould see a pre-tax figure of £5.02 million, against £1.75 million in the previous year. The forecast by Evolution Securities for 2012 is for pretax profits of £37.3 million, as revenues surge from £30 million to £142.4 million. This would bring the price/earnings multiple down to four.
Speculative interest in the shares peaked in July at 56p. The shares have since drifted back to 28p as the market waits for the dreams of growth to turn into reality.
This article was written for our sister website Money Observer
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%.
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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).
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