The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment

By Alan Watson - A Shareworld Contributor

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August /September 2010 - Issue 1

October Edition Just published, click here to read it!

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:AFREN
3. Share of the Moment:Consort Medical
4. Sniffing Around:Chamberlin
5. Penny Spec:Sirius Exploration
6. Straight from the Kennel:Royal Bank of Scotland

Market Comment & Strategy

Investors deterred by the prospect of recession

Only a few months ago investors were optimistic about economic recovery. Both share prices and house prices were showing signs of recovery. Now? A round of economic belt-tightening in the European and US markets has raised the spectre of double dip recession. BP's problems - remember them ? -didn't help. The property market has started to weaken. The number of buyers is dwindling and the number of would-be sellers is rising. Share prices are beginning to fall back.

It's a difficult time for investors. If you have cash, unless you tie it up for several years, interest rates are close to zero. While it is true that the performance of defensive stocks has been reasonable and, frankly, shares in general do not look overvalued, it still takes a certain amount of courage to shift savings into equities. If a double dip recession is on the way, there are no easy answers.
The Eavesdropper team has gained considerable experience in managing investments in difficult markets over the years. For the first edition we have put together a list of shares which look good value, even at this time.

Share of the Month

AFREN

Afren is an independent oil and gas exploration and production . It was founded in 2004, with the intention of becoming the premier pan-African independent exploration and production company, its unique selling point being a differentiated strategy based on a strong African representation in the Board and management. Its business model involves partnering with indigenous companies, National Oil Companies and Governments as well as finding a solution to the vast untapped gas resources in the Gulf of Guinea.

Operating in West Africa over the past 5 years Afren has established itself as a significant oil and gas producer. Currently, it has operations in Nigeria and Côte d'Ivoire producing substantial amounts of oil, gas and natural gas liquids. During this time a reserves and contingent resource base of 163m barrels of oil and equivalents has been established with additional prospective resources identified of 585m barrels of oil and oil equivalents.
In November 2009 Afren raised £104.9m to develop its Ebok-Okoro complex, as well as undertaking further appraisal around infill drilling of its Côte d'Ivoire assets. Afren is, however, not yet into profit, but we believe that it could be set to reach a turning point in the third quarter of 2010, after which it could move perhaps permanently into the black.

The current Market consensus is that, in the year to 31/12/10, boosted by an increase in production, pre-tax profits could be set to emerge at around £125m compared with a loss of £1.3m in 2009. Analysts think that in 2011 ongoing production could generate pre-tax profits of perhaps £345m, a forward PER of 4.4 at the current price of 84½p. This rating is very much on the low side, which we think has created an attractive buying opportunity. Investment Rating: Strong Buy.

Price 97.3p Bid 97.2p Offer 97.4p Year's High: 103p Year's Low: 79p
Prospective PER 17.7 Yield na
Market Capitalisation: £867.2m Year End 31 December
Sector: Mining EPIC: AFR Next Results: Interims - 31/8/10 Full Quote

Share of the Moment

Consort Medical

Making Headway

This is an exciting company involved in the design, development and manufacture of speciality drug delivery devices and services. It is well managed, cash generative, defensive and dividend-paying. Over the next two years or so the management anticipate double-digit growth driven both organically and through mergers and acquisition. After a meeting with the management we believe that the shares offer investors opportunity for growth. At the current price the shares look good value.
The company has two parts, Bespac Respiratory and Injectables, involved in the development and manufacture of drug delivery devices for inhalation or injection and King Systems which manufactures disposable airway management products for the operating and emergency rooms. The group has a worldwide presence and customers include major companies such as GlaxoSmithKline and Merck.

The value in Bespak devices is in the valve. It is essential the devices deliver exact volumes of powder or liquid to users such as asthma sufferers, who carry them around with them to use when required. It is a highly regulated manufacturing environment in which Bespak has a successful track record. King Systems is a market leader in the US with a 35% market share and its international footprint is growing. It operates with a direct sales force of around 40 reps.

Conditions were difficult In the year to 30/4/10. On revenues down from £120.3m to £118.6 pre-tax profits slipped from £17.9m to £16.9m and earnings per share emerged at 42.5p compared with 45.1p previously, a fall of 5.8%. The annual dividend was held at 19.1p. The house broker is forecasting the beginning of a period of extended growth starting in the current year. The group is set to make substantial progress after a period of expansion and reorganisation. Pre-tax profits in the year ending 30/4/11 are expected to be maintained at £17m with earnings per share rising to 43p, a prospective price earnings ratio of 9.6. In 2012 pre-tax profits are forecast to rise to £19.1m with earnings per share of 46p, a prospective p/e of 9.0 and a dividend yield of 4.6% on a maintained dividend. Given this the shares look cheap.
Investment Rating: Buy

Price 413p Bid 410p Offer 416p Year's High: 426p Year's Low: 340p Prospective PER 9.6 Yield 4.0% Market Capitalisation: £119.5m Year End 30 April Sector: Healthcare Equipment & Services Epic: CSRT Next Results: Interims - December (We met with the management on 1/7/10)

Sniffing Around

Chamberlin

A Long Established and Solid Company

Chamberlin, formerly Chamberlin & Hill, is involved in the production and sale of iron castings in various sizes and metal grades. Founded in 1890 It is well known and respected in the engineering sector. Castings are difficult to make and Chamberlin takes great pride in skill of its workforce and the quality of its products, which generally sell at premium prices. Indeed, the management's strategy is built round the phrase: "difficult things, done well." The headquarters are in Walsall.

Activities also include the manufacture and sale of light or smaller casting products to the automotive industry for use in turbochargers, hydraulic pumps and power steering systems, as well as low volume specialised castings for use in power generation, construction and other areas. It also offers emergency exit fittings, architectural ironmongery and other products used in office developments, restaurants, colleges and other private and public buildings.

In the year ending 31/3/10 there was a pre-tax loss of £1.1m on turnover of £28.5m compared with pre-tax profits of £0.3m on turnover of £39.9m in 2008/09. It was a challenging year but there were signs of recovery in the second half which have continued into the current year. In particular, the company has achieved new business in the turbocharger market.

The annual dividend was passed and is unlikely to be reinstated until 2011/12. However, the current year, ending 31/3/12, is expected to see a return to the black. The consensus is that pre-tax profits could emerge at £0.6m, implying earnings per share of 5.98p, a prospective PER of 11. Further progress is anticipated with the house broker forecasting pre-tax profits of £1.3m and a return to the dividend list.

Price: 86.5p Bid 83p Offer 90p; Sector: Industrial Machinery; Market Capitalisation £6.285m; Epic CMH. (We met with the management 1/7/10)

Penny Spec

BHP's bid for Potash, the Canadian mining company has made investors aware of what gardeners have known for ages, that Potash fertilizer makes food crops grow. Potash, chemical name potassium carbonate, has wide applications - it improves crop yields and nutrient values as well as disease resistance in food crops. BHP has been motivated to make a bid for a producer as it is a fair bet that the demand for food, which has been rising steadily for the past 10 years, could be set to accelerate as third world populations increase. Potash is mined in many places with North America and Australia major producers. Around 90% of mining production is used to make potash, the balance being used to make a number of products, including soap, glass and water softeners.

The potash market is dominated by large companies. There is, however, a penny share which we think looks an interesting situation. Sirius Exploration is a mining company which is focused on potash and salt deposits in North America and Australia. It has a number of drilling permits and has just secured an Exploration Permit to drill an exploratory hole in North Dakota to test for potash and other minerals. The share price reached 15p in 2009 but plunged to current levels when a loss of £3.8m in the year ending 31/3/10 was reported. However, the market consensus is that losses could reduce in the current year. We think that Sirius's fortunes could improve as the demand for potash continues to increase. 


Update. We tipped the shares at 3.5p. On 6/9/2010 they soared to 9.5p before slipping back to current levels. The shares remain a buy.

Price 8.25p Bid 8p Offer 8.5p; Sector: Mining; Market Cap: £53.1m; EPIC SXX

Straight from the Kennel

The other day I was sitting outside the kennel when a strange dog wandered into the street. He was a slight, timid looking individual who glanced round nervously as he walked along.

When he drew near I saw that the top of his tail was missing, he'd lost half of his right ear, and there were several cuts on his cheeks. He also walked with a limp.

"Hi, " I said. "Had an accident?" He nodded, wincing at the pain from his stiff neck. "Several," he said gloomily. "I fell down the stairs this morning and put my back out. Hurt my leg, too."

"And what about the rest?" I asked. "Oh, the tail got shortened when someone slammed a car door just as I was passing, the ear got cropped when I accidentally sat too close to one of those revolving fans, and my face got scratched when the wind blew some bushes in my face as I was coming here."

"And what's your name? I asked.

He smiled sadly. "Lucky," he said.

No, I didn't laugh. Instead, I said: "Well Lucky, what brings you here?"

"I'm looking for a dog called Oswald - he's my cousin." I shook my head. "I don't know any Oswald." Lucky looked round. "Hot damn!" he exclaimed. "I'm in the wrong street!"

"Never mind," I said. "Now you're here, what are you doing in these markets?"

"I'm selling Royal Bank of Scotland," he said.

"Are you sure about that?" I asked, surprised. "The shares are completely bombed out at current levels. I quite like Royal Bank of Scotland. It's probably needed more attention than the other banks that were hit by the crisis and it's currently 84% owned by the Government. It's still in the FTSE 100 Index and it's now profitable. The shares are standing at around 46p which compares with 500p just two years ago. I think it might go back to the higher price levels when it becomes independn in due course."

Lucky shook his head. "I think the company's just a walking overdraft," he said adamantly. "And I'm a seller."

"Well," I thought, "what better reason for buying the shares than the world's unluckiest hound turning seller?"

"I suppose I ought to be going," he said. "It was nice meeting you." With that, he strolled off. When he reached the corner, he turned to wave - and fell over a dustbin he'd failed to notice.

Price: 46p Bid 45p Offer 47p; Sector: Banks; Market Capitalisation £26.624m; Epic RBS.