The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment

By Alan Watson - A Shareworld Contributor

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November 2010 - Issue 3

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:ELEMENTIS
3. Share of the Moment:GB Group
4. Sniffing Around:DDD, PUNCH TAVERNS
5. Penny Spec:Vane Minerals
6. Straight from the Kennel:Coal of Africa

Market Comment & Strategy

The period leading up to the Government's Comprehensive Spending Review was tense but, in the event,there were no unpleasant shocks and investors collectively breathed sighs of relief. This was reflected in the Market where share prices picked themselves up from the lower levels.

What helped to calm the mood was that seeing the details helped to bring home the message that the cuts are spread over four years so that the impact would be relatively subdued. The main negative was seen as the loss of jobs in the public sector. even here investors were soothed by the timescale of the redundancies and the fact that a significant proportion of the cuts would be through natural wastage. Sterling moved up on the back of this and fell on the news that the Temporary levy on bank balance sheets will be made permanent. (There's a message there somewhere, but we haven't quite fathomed it out.)

The thing to remember is that the cuts are actually real and that they are bound to slow down economic activity, so tough times do lie ahead. The British Public's calm acceptance of the measures is very good news as it indicates that positive psychology prevails, which could help reduce the period of austerity which lies ahead. Let's hope so.

Share of the Month

ELEMENTIS

Profits could be set to rise in 2010

The company manufactures and sells specialty chemicals worldwide. It employs over 1200 people at more than 30 locations and 8 countries. Elementis has three world wide areas of operation:

• Specialty Products - the manufacture of rheology (flow) control products used in solvents and water based coatings applications as well as applications in the construction, oil drilling and personal care markets;
• Surfactants - the production of surface active ingredients used in oilfield chemicals, pulp and paper and household products.
• Chromium - the manufacture of chromium chemicals used for leather, metal and timber treatment treatment as well as metallurgical, pigmentary, ceramic and refractory applications.

Founded in 1844, the company's headquarters are in London.

Despite difficult conditions experienced during the year to 31/12/09 the group turned in a reasonable set of figures given that demand for its products are very sensitive to the level of economic activity. Helped by reorganisation and cost cutting, operating profits before exceptional items fell from £48.5m to £18.3m on turnover down from £400.5m to £313.7m. Earnings per share fell from 9.1p to 2.6p. During the year Deuchem was fully integrated into the group and contributed an estimated £23.4m to year on year sales. Deuchem has proved to be a winner and consideration is being given to further acquisitions in China.

It was also revealed that the company was fined Euro !4.3m for its membership of a cartel which manipulated the prices of heat stabilisers. The fine was paid in January 2010 but there is an ongoing dispute over a further fine of Euro 18.3m served jointly and severally on members of the cartel. Elementis believes that it is not liable.

Meanwhile, actions taken in 2009 to improve performance have strengthened operations. We think that pre-tax profits in 2010 could be set to recover to around the 2008 level, perhaps to £25m. This implies that the shares are currently trading on a prospective PER of 14.6 and a yield of 2.4%. We hope to see a further acquisition in China which could further strengthen the group's growth potential.
Consider as a buy..

Price: 120p Bid 119.8p Offer 120.3p; Sector: Chemicals ; Market Capitalisation £537.8m; Epic ELM
(We last met with the management on 19/2/10)

Share of the Moment

GB Group

Identifying with growth

GB is a software company focused on the growing market of identity management. It is a leading provider of Identity management software and services specialising in electronic

GB Group helps organisations realise the full value of their customer base by recognising and verifying all elements of a consumer's identity at every interaction. Through the application of the Company's technology, it protects, predicts and provides information that is used to maximise customer value for some of the largest companies in the UK. GB Group has three complementary offerings:

• Identity Verification - combating ID fraud, money laundering and underage gambling
• Identity Capture and Maintenance - providing customer information for contact strategy
• Identity based Marketing - understanding, targeting and retaining profitable customers.

The main country of GB's operation is the UK. With over 50% of its software sales delivered on-line and with revenues which are 78% recurring, the company is highly cash generative. Cash balances currently amount to £4.7m, there are no borrowings and no pensions deficit.

The interim Management Statement indicated that some improvement in background conditions is helping GBG's performance. Indeed the management believes that difficult economic conditions could create opportunities for market consolidation. The company has moved from the Main Market to the AIM in order to further its expansion by acquisition. The AIM offers greater flexibility as acquisitions can be more quickly and more cost effectively.

All in all, GB appears to be going from strength to strength. The directors have just announced that the first half has been stronger than expected and that the results, and those for the full year, are likely to be considerably better than expected. The market consensus was that full year pre-tax profits were set to rise from £1.21m to around £1.45m. We think that this figure could be increased to £2m, putting the shares on a prospective PER of 14. Assuming that profits growth continues into 2011/12 profits could reach perhaps £2.5m, suggesting that the shares could be trading on a forward PER of 12, which looks cheap.

Although the profit projections above are somewhat tentative, GB Group looks a good situation. We met with the management recently and came away impressed.
Consider the shares as a buy..

Price 34¼p Bid 34p Offer 35½p; Sector: Software and Computer Services; Market Capitalisation £293m; Epic GBG
(GB Group is quoted on the higher risk Alternative Investment Market.)

Sniffing Around

DDD

Prospects that leap out at you

The company is involved in the licensing of software and hardware, intellectual property and technologies in the area of the conversion of content from two dimensional (2D) to 3D. It supplies hardware services and internal protocol (IP) to enable the viewing of 3D images. Products are sold to the television, mobile phone and personal computer markets.

DDD expects 3D conversion capability for high definition programming to be instrumental in creating content for 3D broadcast channels, many of which are being launched at the present time by broadcasters in the US, Europe and Asia. Indeed, the market for 3D consumer devices is gathering momentum. The company continues to experience positive interest in its products and expects to secure further licensing contracts, particularly personal computers, next generation 3D televisions and 3D TV peripherals.

However, in the 6 months to 39/6/10 turnover was marginally down from £726,000 to £723,000 due to delays in third-party PC hardware which hit the supply of 3D PC products. This situation could be resolved shortly and feed through to business in 2011. Although turnover was down losses reduced sharply from £431,000 to £262,000. Net cash at 30/6/10 was £3.371m compared with £266,500 previously, as a result of a placing which raised £3.380m. During the first half of the year DDD benefited from the success of Samsung's 3D PC products.

We had hoped that 2011 would see DDD moving into the black, but the market consensus is that this is unlikely. Due to the delays mentioned above, 2010 is likely to produce a loss of perhaps £1.2m. Despite this, we feel that a move into profit 2011 is not impossible, especially if the US economy begins to pick up. We believe that the both the 3-D sector and DDD have a promising future.

Price: 19¼p Bid 18½p Offer 20p; Sector: Software and Computer Services; Market Capitalisation £21½m; Epic DDD

PUNCH TAVERNS

Rationalisation measures improve Punch's prospects

The company is a leading leased and tenanted pub company. It is the country's second largest pubs group, with a portfolio of 7,800 pubs across the UK. In September 2004, Punch Taverns acquired the InnSpired Group, an estate of 1,064 pubs to the value of approximately £335 m. It has continued to grow, recently acquiring Mill House Inns for £165m in cash, in a move which came only 9 months after the £2.7bn takeover of rival pub group Spirit.

Punch Taverns helps its retailers build better businesses by: maximising the overall profitability of every site through the recruitment and retention of high quality retailers; optomising the share of the available profit by selecting the appropriate terms for the Retailer Agreement; and by growth though selective acquisitions. The recent trading statement confirmed that the group has continued to benefit from improved operating standards, increased refurbishing and somewhat better summer weather.

The results for the year to 21/8/10 showed pre-tax profits down from £160m to £131m. This was a reasonable result, given the difficult background. Conditions remain difficult but we think it possible that pre-tax profits for he current year, which ends August 2011, could emerge at £125m. If achieved, earnings per share could emerge at around 14p, a forward PER of 5. At this level the shares begin to look cheap. Meanwhile, the interim results, covering the six months to end February 2011 are due on 22/4/11.

Some signs of recovery and ongoing rationalisation measures have lightened the gloom surrounding the share price. There have even been rumours of a possible bid.
Consider the shares as a speculative buy.

Price: 70¼p Bid 70p Offer 70½p; Sector: Travel and Leisure; Market Capitalisation £407m; Epic PUB

Penny Spec

Vane Minerals is at a turning point

Vane Minerals is a self-funding exploration company, financed from the Silver/Gold Diablito in western Mexico. It was founded by the former international exploration team of Freeport McMoRan Copper & Gold Inc, one of the world's largest producers of copper and gold. The team had exclusive access to FM's global exploration database. Vane has recently build up a substantial uranium portfolio in the US and has projects in Mexico, Paraguay and the US involved in gold, silver, copper and uranium. Following a placing in September 2010 at 2p per share raising £2.145m before expenses, current plans look well funded.

In January 2010 the Chairman stated, "Let there be no mistake: Vane minerals will hit the ground running". The flow of good news began when, in March 2010, Vane revealed that the Wate breccia pipe in Arizona which it owns jointly with Uranium One, contained 695,000 pounds of U308 contained in 43,000 tonnes of rock, a U308 density of 0.8%. This was seen as a good result: the technique used to mine single breccia pipes involves exploiting as quickly as possible high margin deposits. In June 2010 there were several news releases relating to Vane's activities - production in Mexico, copper porphyry exploration in the USA and uranium development projects in Arizona.

In September 2010 Vane had to deal with smelter problems after one of the smelters it used closed down. The decision was made to raise cash through a share placing in London (see above) and build its own facility. This, the directors believe, is a turning point in the company's approach.

The next annual report, covering the year to 31/12/10, is due on 26/4/11. Meanwhile, we anticipate further positive news concerning the acquisition and exploitation of mineral assets and the building of the smelter. We think that the company has now found its way and that there is currently an early stage opportunity for investors to participate.
Speculative Buy.

Price: 2.6p Bid 2.5p Offer 2.75p; Sector: ; Market Capitalisation £8.62m; Epic VML
(Vane Minerals is quoted on the higher risk Alternative Investment Market. See important note at end).

Straight from the Kennel

Lucky and I have become good friends. None of his bad luck has spread to me, at least so far, and he was thrilled when his purchase of Low-Q at 106p first moved into profit. Well, they've risen over a penny and currently stand at 107½p.

We'd decided to go for a walk. After what seemed like days, I'm not as fit as I should be, we were well away from the built up area and surrounded by pleasant countryside. Lucky took a deep breath of fresh air. "Reminds me of Spring," he said.

Coming out of some woods, we were suddenly confronted by a large fence. Behind the fence were thousands of large, very fat birds. They were waddling around, bumping into one another, fighting and generally making a terrific din. Lucky was awed. "My goodness," he breathed. "A turkey farm! Let's go and take a look." Just then a particularly large bird caught sight of us and waddled across to the fence..

"Hi dogs," he said cheerfully. "How's it going?"

"Not bad," I said. "We're just out for a walk. Don't you wish you could do the same?"

He shook his head, the loose skin on his neck flapping about. "It does get a bit tedious at times, although generally it's not too bad. There's more than enough to eat and there's loads of company. Oh, and there's the injections." He smiled dreamily. "Oh, I love those injections."

"But that's no way to live," I said. "You ought to be free - like us. You could pay us a visit!"

He glanced furtively over his shoulder. "As a matter of fact, we've decided that we're going to stage a mass escape. There's a committee and we've already started digging a tunnel."

As he was talking my thoughts turned to considering what I ought to be buying. The word "tunnel" made me think of Coal of Africa (CZA), which I'm sure digs loads of them. Since 2007 the company has developed from a junior to a mid-tier producer and the share price currently stand at around 86¼p. Currently it has a primary quote on the Australian market and, in the UK, is quoted on the Alternative Investment Market. It intends to seek a full listing in London. CZA operates 4 thermal coal mines in South Africa and has a promising pipeline of projects. Analysts are predicting that the year to 30/6/11 could prove to be pivotal, with the company moving into substantial first time profit. The consensus is that the company could be trading currently on a forward PER of between 8 and 9, which looks good value. I decided to buy a few.

"So," I said. When do you think you might escape?"

The turkey winked conspiratorially and said quietly: "Confidentially, I think it'll all be over by Christmas."

Coal of Africa: Price: 86¼p Bid 86p Offer 86½p; Sector: Mining; Market Capitalisation £457.6m; Epic CZA
(CZA is quoted on the higher risk Alternative Investment Market. See important notes on page 4)

UPDATE: Company News

Afren

2010 has, so far, been a year of unprecedented activity for Afren. In Nigeria, Afren's support of First Hydrocarbon Nigeria's acquisition of a 45% stake in OML 26 from the operating subsidiaries of Shell, Total and ENI has strengthened its position in that country. The acquisition could substantially increase Afren's NAV, and is a strong endorsement of its long term strategy. The existing platform of producing assets continues to underpin the business and provides strong foundations for further growth. The Ebok field development is progressing well with first production expected by the year end. Having also now completed the acquisition of Black Marlin, opening up a new core area for us in East Africa, Afren is entering an active exploration phase, with a number wells scheduled for 2011.
We first tipped the shares at 97.3p (Issue 1 - Aug/Sep 2010) - Keep Buying.
Afren: Price: 128p Bid 127.9p Offer 128p; Sector: Mining; Market Capitalisation £1.25bn; Epic AFR