The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment

By Alan Watson - A Shareworld Contributor

Please Login here.

FEBRUARY 2011 Issue 6

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:BARRATT DEVELOPMENTS
3. Share of the Moment:ATH RESOURCES
4. Sniffing Around:AMINEX, CML Microsystems
5. Straight from the Kennel:Dechra Pharmaceuticals
6. Update:Thomas Cook

Market Comment & Strategy

Over the past few weeks the Market’s attention has been focused on political troubles in Egypt. There seems to be some optimism that President Mubarak will step down which would allow the possibility of the formation of a new government. However, it’s never as simple as that and the problems may roll on for some time before a stable government is in place. This could create a period of considerable insecurity exacerbated by worries such as rising food inflation. Investors have withdrawn significant amounts from emerging market funds.

In the UK Government cutbacks continue. VAT was increased at the beginning of the year and various measures have been brought in to reduce handouts and allowances. The public has also had to contend with a rise in the price of oil. As we write, David Cameron is tackling the banks over bonus payments.

The Stockmarket, however, has remained in a buoyant mood. The FTSE 100 has moved over the 6000 level for the first time since July 2008. This demonstrates how many of the problems come from the structure of the UK economy. Most of the quoted companies are international and operate mainly outside the UK where some economies are returning to growth. They are, therefore, relatively unaffected by what is happening in the UK. economy, hence the rise in their share prices. It is worth adding that they also pay dividends in contrast to UK bank deposits which pay little or no interest.

Share of the Month

BARRATT DEVELOPMENTS (BDEV)

The company, which is involved in housebuilding and commercial development, is a well-known name in UK construction. We believe that, despite the current dire straits of the housing market thanks to the dearth of mortgages, Barratt developments looks good value. The company recently issued a cautious trading update which confirmed that it could be on track to meet its operating targets for the current year, ending 30/6/11. The shares fell on this, reflecting profit-taking after a run-up in the share price ahead of the announcement.

It was revealed that, in the six months to 31/12/10, revenues were £875m, similar to those in the same period of 2009. Completions were down 4% to 4,832 units but, with an average selling price of £170,000, up 6% on the previous year. Some 24% of sales were in social housing with private sales averaging £192,000 per unit, up 11%.

Barratt has been buying up land cheaply during the downturn so, should house prices remain stable or, indeed, start to rise, profits are likely to increase substantially. First half operating profits improved significantly, with margins rising from 2.4% to 5%.

The Market is forecasting pre-tax profits of £26m for the year to 30/5/11, which implies that the shares are currently trading on a PER of 45. Analysts, however, are looking for pre-tax profits of £65m in 2012 which, if achieved, would reduce the PER to around 16. Looking to 2013, they expect the PER to fall to around 8 as profits recover. Given this recovery, they expect the dividend to be restored. The shares look an interesting recovery play. Buy.

Price: 96.7p Bid 96.6p Offer 96.8p; Sector: ; Market Capitalisation £933.4m; Epic BDEV Next Results: Interims 24 February

Share of the Moment

ATH RESOURCES (ATH)

ATH was listed on the AIM in 2004 and is one of the UK's largest coal producers. It operates surface coal mines and the subsequent sale of coal to electricity generators, industrial and domestic customers.

When the mines are exhausted the sites are substantially landscaped. The group currently operates three surface mines in Scotland and two more are scheduled to come into production in the current year. ATH employs 250 people across its surface mines and at its offices in Doncaster and Fife. The company has supply agreements with Drax Power, E.ON UK, Scottish Power and EdF. Approximately one-third of the electricity in the UK is generated from coal. Generation currently uses 40m tonnes per annum and demand is increasing. With the reduction of coal production in the UK some 50% of coal requirement is currently imported from overseas producers - Russia, Columbia, South Africa and the USA.

The domestic market remains important. ATH supplies to factors who supply to local coal markets. The group has a long history of supplying into the sector. Demand from consumers is seasonal but stock building during the summer by suppliers evens out demand.

The year ending 2/10/10 was one of the most difficult in the groups's history. Production was restricted as heavy rains in Cumbria caused flooding and disrupted production from the Ayrshire mines. This was followed by heavy snowfall and cold temperatures which were the worst in a century. The group's 12 kilometre conveyor was unable to operate, slowing delivery of coal to customers. Operating profits were down from £9m to £7m. Sales rose from £76.2m to £78.3m. During the period ATH Regeneration was sold for approximately £6.5m, allowing the group to reduce debt from £39.4m and focus on core activity. Pre-tax profits from continuing operations were £4.0m compared with £6.1m previously.

Pre-tax profits look set to rise to around £5m in the current year, which ends 3/10/11, with earnings per share of 10.1p and a dividend of 4.5p which imply that the shares could be trading currently on a prospective PER of 6.8. It likely that 2012 will also be a good year, benefiting from operational improvements. Analysts are forecasting pre-tax profits of around £9m, a forward PER of around 7and a yield of over 6%. BUY.

Price 68.5p Bid 67p Offer 70p; Sector: ; Market Cap: £27.5m; EPIC ATH
Next Results: Interims 30 June
(ATH Resources is quoted on the higher risk Alternative Investment Market. See important notes at end.)

Sniffing Around

AMINEX

The Company, which has operated internationally since 1991, is an established upstream oil and gas company listed on the London and Irish Stock Exchanges. It produces oil and gas in the USA, with ongoing exploration activity in Tanzania, North Korea, Kenya and Egypt.

Aminex invests directly with equity or as the operating partner in a consortium of several oil and gas companies. It has a strong team of operating professionals accustomed to working in challenging international environments and able to integrate flexibly with specialists of other nationalities and cultures. Aminex's aim is to build a base of exploration and production around the world, balancing high risk-high reward exploration activity with steady growth core producing areas.

Based in London, a world centre for oil and gas transactions, Aminex encounters a large variety of international opportunities, only a minority of which it is able to pursue alone. For this reason it is continually on the lookout for international joint venture partners to participate in its projects.

In the year ending 31/12/09 the company slashed its losses from US$9.7m in 1998 $2.9m. The market, however, focused on revenues which were down 23% to $7.8m as a result of lower gas and oil prices, although physical production was higher. Gas production was up 56% and the "Sunny Ernst" had its first year of full production. However, the price falls resulted in a 50% decline in gas revenues and a one-third fall in oil revenues. At the same time the company upped its exploration spend by £5m. Overall, 2009 was a difficult year.

The results for the six months ending 30/6/10 showed pre-tax losses widening to £2.03m compared with the loss of £0.82m in the first half of 2009. However, oil and gas prices have been increasing in the second half so that pre-tax losses for the full year ending 31/12/10 could amount to around £2.5m, similar to the loss in 2009.

The good news for Aminex is that oil and gas prices look set to continue to rise in the first half of 2011 and probably beyond. Aminex's broker is forecasting a return to the black with full year pre-tax profits of £1.45m and earnings per share of 0.35p. A significant rise in the asset value is also likely. The company has recently been raising funds for further exploration projects. Consider the shares as a speculative buy.

Price 12p Bid 11p Offer 13p; Sector: Upstream Oil & Gas; Market Cap: £54.5m; EPIC AEX.L
Next Results: Finals 1st April

CML Microsystems

CML Microsystems Plc was founded in 1968 in the United Kingdom (as Consumer Microcircuits Limited). Today, through operating subsidiaries located in the UK, the United States, Germany and Singapore, the Group predominantly designs, manufactures and markets a range of semiconductors (integrated circuits or IC's) for global industrial, professional and consumer applications within the wireless communications storage, wireline communications and networking market areas.

It is headquartered in Essex, and employs approximately 170 personnel worldwide. The company operates a 'fabless' semiconductor model (outsources silicon wafer fabrication) and performs IC assembly and test functions at facilities in the UK and through subcontractors around the globe.

The company has had a difficult time, making losses last year. We think this is now over and that there could be a move into the black. We estimate that pre-tax profits in the current year could emerge at around £2.1m, a prospective PER of 19.8 which could reduce to 12.5 if the company can lift per-tax profits to £3.5m in the year to 31/3/12. Speculative Buy..

Price 205.5p Bid 205p Offer 206p; Sector: Technology and Hardware Equipment; Market Cap: £30.7m; EPIC CML Next Results: Finals 14 June (We met with the management on 31/1/11)

Straight from the Kennel

Dechra Pharmaceuticals

Zark (Noah to his friends), Eddie the Beagle and I recently invited Lucky, the world's unluckiest dog, to dinner at my kennel. I noticed that the others seemed reluctant to have him in theirs, worried no doubt that some of his bad luck would occur during the meal.

Anyway, there we were, feasting on a mixture of Golden De Lux Doggibix, and Platinum Doggy Treat Canapés, washed down with gallons of Dogslayer Weapons Grade Export Lager.

Lucky was in good spirits and was telling us about how he had lost various body parts through random episodes of bad luck. He had even been struck by lightning. Apparently he had been walking through the woods during a thunderstorm when it happened.

"Funny thing," he concluded. "The lightning missed all of those trees and struck me." I noticed Eddie the Beagle edging nervously away from him and Noah Zark throwing salt over his shoulder when he thought no one was looking.

Dinner over, we lounged back and opened a few cans of Dogslayer Dessert Lager. Noah was burping quietly and Eddie was humming tunelessly. Lucky suddenly piped up: "You know," he said. "You're a bunch of fat boys! No wonder the moggies around here look relaxed - you can't catch them. At least I'm doing something positive. I've been buying shares in Dechra Pharmaceuticals."

Instantly we were all listening intently. "Why?" growled Eddy. Lucky grinned. "The company was founded by the managed buy-out of Lloyds Chemists. Remember them? It’s now an international pharmaceutical business focused on the veterinary market. It’s concentrating on the development and marketing of companion animal products. Let's face it, with the amount of lager you three put away, you're heading for medical problems.. Anyway, Dechra's products are making excellent progress and there's likely to be positive news flow throughout the year. Analysts are looking for pre-tax profits of £30m for the year to 30/6/11, a prospective PER of 14.3. They expect profits for the year to 30/6/12 to rise to around £35m."

Sounds a good idea," I said. "Maybe your luck's changing. I think I might have a few!" "Me too," said Zark. "Drugs certainly beat jogging!".

Dechra Pharmaceuticals: Price 505p Bid 502p Offer 508p; Sector: Pharmaceuticals & Biotechnology; Market Cap: £335m; EPIC DPH

UPDATE

Thomas Cook - First Quarter Results

A month ago, it seemed a good idea to tip Thomas Cook shares. They looked good value and, with the holiday season not so far away, buying into one of the main travel agents seemed a logical move. Then problems in Egypt hit the headlines. Approximately 7% of the company’s profits come from Egyptian holidays and it is possible that, even when the problems have gone, people might go elsewhere rather than take the risk of being stranded if they flared up again. There is also the possibility that the unrest could spread to other areas of North Africa.

Tipped at 204.6p last month the shares currently stand at 197.8p, so it’s not a complete disaster. Indeed, TC has just published a good first quarter report covering the period to 31/1/10, which includes the crisis in Egypt. There will be some damage to profits, but it’s too early to quantify it. TC has been moving towards medium-haul, all-inclusive luxurious and higher margin holidays. The change should be completed in the second quarter and full year results should reflect the benefits. The first quarter figures revealed higher revenues with the usual seasonal loss lower than average.

The outlook for the current year is not all that bad. Summer bookings are currently up by 13% in Northern Europe, 8% in Central Europe and 6% in the UK. Amongst analysts researching the Company there are no sellers. The consensus is that the shares are currently trading on a prospective PER of 7.8 and a yield of around 5.5%. 2012 is expected to see a further rise in profits. We continue to rate the shares as a buy.

Next Results: Interims 13 May
Price 195.5p Bid 195p Offer 196p; Sector: Travel and Leisure; Market Cap: £1,678m; EPIC TCG