The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment Newsletter

By Alan Watson - A Shareworld Contributor

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Previous Issues

November 2011 - Issue 13

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:ROYAL AND SUN ALLIANCE
3. Share of the Moment:ASHTEAD
4. Sniffing Around 1:CENTRICA
5. New Entrants 1:ZETAR
6. Straight from the Kennel:Senior

Market Comment & Strategy

In September we were a bit early in anticipating a rise in share prices having believed that the US economy's slowing growth rate and European indebtedness had been fully discussed and reflected in share prices. Investors, however, seemed to think that there was more bad news in the pipeline and recovery stalled. Talks are ongoing in Europe but disagreements between France and Germany are holding up decision-making Worries still continue to focus on the Greek economy as well as on those of Italy and Ireland.

However, as we go to press share prices have been rising as bargain hunters snap up stocks which look oversold. This time it is we who are not convinced. Economic news continues to be worrying and most forecasters are expecting weak markets to prevail over the next year - or longer.

One of the more comforting aspects of the past year has been, in the main, that companies have not cut their dividends. The fall in share prices has, therefore, created a background of higher yields. Take RSA for instance. During 2011 the shares have fallen 21% from 145p to 113p. The dividend has been maintained and the annual yield to new shareholders is currently around 8%. Analysts are forecasting a small increase in the dividend this year and again in 2012. Of course, there are no guarantees, but so far there has been no suggestion of a dividend cut, which makes the shares look interesting. Other interesting companies are: Aviva, currently yielding 7.1%, British Land 5.1%, United Utilities 5.4%. We think that buying blue chip high yielders could prove to be a useful, if speculative, strategy in current markets.

Eavesdropper

Share of the Month

Comment on ROYAL AND SUN ALLIANCE

The year 2010 was a difficult year for RSA. Extreme weather conditions during the year and the Chilean earthquake combined to push operating profits down by £77m to £636m. However, background conditions so far in 2011 improved over 2010 and a better result is anticipated for the full year.

The figures for the six months ending 30/6/11 revealed pre-tax profits up from £297m to £371m, a rise of 15%. Earnings per share edged higher from 5.33p to 5.7p and the interim dividend was raised from 5.33p to 5.7p. This was encouraging given that pre-tax profits for the year to 31/12/10 were down by 11.2% to £492m. In his interim statement the CEO said that the underlying performance was “robust”, He went on to say that the group’s strategy of targeted growth in the UK while pursuing strong growth in International and Emerging Markets will continue to shift RSA’s business towards these those regions.

In the current year, which ends 31/12/11, the consensus is that RSA’s pre-tax profits could be set to rise from £492m last year to around £718m this time, implying that the shares could be trading currently on a prospective PER of 8.1. Looking to 2012, if pre-tax profits grow to perhaps £760m, as some analysts are forecasting, the forward PER falls to approximately 7.2.

We think that RSA’s shares are beginning to look cheap, backed by a particularly high yield of over 8%. Rumours that claims arising from the recent riots in the UK would significantly reduce profits are, we believe, wide of the mark. Strong Buy.

Price 112.75p; Activities: Engaged in the transaction of personal and commercial general insurance; Market Cap: £4.0bn; EPIC RSA Next Results: Finals - 23-Feb-12 Full Quote - RSA is a constituent of the FTSE 100 index

Share of the Moment

ASHTEAD

The company, which is involved in the rental of industrial and commercial equipment, mainly to the building and construction sector both in the UK (trading as V-Plant) and the US (Trading as Sunbelt). It was badly hit by the financial crisis and in December 2008 the share price slumped to 29p. Subsequently it recovered to 200p as profits began to show signs of recovery. However, in the nervous market of the past few months the share price retreated to around 100p, although it has recently recovered to stand at the 140p level, following an optimistic trading statement.

The economic downturn hit Ashtead badly with profits plunging from £150m in the year ending 30/04/07 to just £5m in the year to 30/4/10. Since then, however, there have been strong signs of recovery. In the year to 30/4/11 pre-tax profits recovered to £31m. While this was still well below the levels of four years earlier, broker research suggests that pre-tax profits could be about to rise to perhaps £70m in the current year, which ends 30/4/12, suggesting that the shares are currently trading on a prospective PER of 15.6. In the year ending 30/4/13 the consensus is that pre-tax profits could reach the £100m level, a forward PER of 10.5 and a yield of 2.8%.

In the meantime, in the first quarter of the current year, which ended 30/4/12, pre-tax profits more than doubled from £14m to £33.1m. This was thanks to a fall in net financing costs as a result of an astute debt refinancing in the year to 30/4/11.

The profits increase underpins our forecast of £70m for the full year. If pre-tax profits reach the £100m level the shares could be trading currently on a forward PER of 10.5 which suggests that the shares are beginning to look undervalued . Strong Buy.

Price 159p; Activities: Equipment rental to industrial and commercial users; Market Cap: £800m; EPIC AHT; Next Results: Interim 9 December Full Quote

Sniffing Around 1

CENTRICA

The company’s recent presentation on British Gas served to reassure investors. There had been considerable worries weak demand from the slowing economy on top of rising operational costs. Centrica, however, has been able to put through price increases to residential users. On balance, CNA is now expected to produce relatively stable profits both in the current year and 2012, which we suspect, will be somewhat better than the most of the rest of the UK economy. The Service Activities, involved in the repair and servicing of energy production assets, such as boiler repair, may show a slowing growth rate. Nevertheless, double digit growth is likely. Importantly, services operations which are likely to benefit from increased energy efficiency measures in the general economy, should contribute significantly to the group’s future profits growth. Centrica’s business model is impressive. It owns producing assets as well as distribution, retail and service operations. This is the key to the strength of earnings. Shareholders have one main worry, the Government’s close scrutiny of companies involved in energy - which is a prime strategic asset. We thought it worth mentioning that although Free Enterprise dislikes interference, it is difficult to argue in this case as, logically, under the democratic system, the basic assets and output belong to the people. So far the Government’s participation as been relatively benign and looks likely to remain so. We think that Centrica looks an excellent buy in current market conditions. It is large, profitable and looking increasingly efficient. The shares are currently trading on a prospective PER of 411.8 and a dividend yield of 4.9%.

Price 308p; Activities: Gas, Water, Multiutilities; Market Cap: £15.3bn; EPIC CNA Next Results: Finals - 24 February Full Quote - Centrica is a constituent of the FTSE 100 Index

New Entrants 1

ZETAR

The company is a leading manufacturer of confectionery and natural snacks with a reputation for quality and product innovation. It has strong relationships with all major UK food retailers and with many global media brand licensors. Zetar’s strategy is to develop and grow a snack foods and confectionery group, with a reputation for quality and product innovation. Currently it intends to extend over time its operations to include Continental Europe.

In the year to 30/4/11 on revenues up 2% to £135.0m Zetar reported pre-tax profits up 6% from £6.4m last time to £6.7m. Earnings per share rose 9% to 36.5p and a first dividend, 2.25p per share, was announced - dividend yield of 0.9%. At the end of the period Zetar’s net asset value amounted to £3.50 per share.

The Chairman commented on the improved quality of business. Over 33% of sales were generated by brands and higher margins were achieved on sales of Natural Snacks. He was also encouraged by the strong pipeline of licensed brands and by the progress made in the integration of Derwent Lynton, which was acquired in April 2011.

The current year has started strongly with the first 11 weeks up 6% year-on-year from £16.2m to £17.2m. Elsewhere strategic partnerships have been formed with two major European companies creating a “one-stop shop” for licensors covering all confectionary categories across the UK and Europe. The signs are, therefore, that Zetar set to make steady progress.

We believe that in the current year, which ends 30/4/12, pre-tax profits could be set to increase from £6.7m to £7.1m with earnings per share up from 37.3p last time to 40.3p. We also expect a rise in the annual dividend to 3p, implying a prospective yield of approximately 1.4% We regard the company as well funded and efficient. Further progress is likely in 2012/2013. Buy.

Price 221p; Sector: Engaged in the confectionary and snack food business; Market Cap: £29.3m; EPIC ZTR; Next Results: Interim - 25 January Zetar is quoted on the higher risk Alternative Investment Market. (We met with the management on 1/9/11.)

EAVESDROPPER
Straight from the Kennel

Senior

Dogs tend to be territorial but enjoy walking. Some of us even find it relaxing to take a trip into new areas. So it was that my old pal Eddie the Beagle and I set out for a day's outing into the countryside.

After what seemed like days to us fat boys, but probably no more than in an hour, we were well away from the built up area and surrounded by pleasant countryside. Eddie 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 made me look like Twiggy. Anyway, they were waddling around, bumping into one another, fighting and generally making a terrific din.

Eddie 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. "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 although generally it's not bad. There's more than enough to eat and there's loads of leisure time. 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." The turkey glanced round furtively. "I agree," he said in a low voice. "As a matter of fact some of us have formed an escape committee. We're digging a tunnel under the fence behind the barn. We've set ourselves a timetable."

That last sentence reminded me of Senior, the aerospace and defence group which designs and manufactures high tech components and systems. I last tipped them as a buy in 2008 when the shares fell 60% from its April high of 120p. Investors were spooked by thre strike at Boeing, Senior’s major customer. Three years on the shares currently stand at 160p, well below the high of 190p reached in July this year. However, they were around 50p in 2008, so progress has been achieved. I think there’s still more to go for, even in these markets.The current price puts the shares on a prospective PER of 11.9 if pre-tax profits for 2011 rise, as expected, from £52.1m to £75m. The shares look worth a buy.

I turned to the turkey. "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."