Investment Column: Solid Dana can defy the rumour-mongers

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The Independent Online


Our view: Buy

Share price: 1,229p (-22p)

Dana Petroleum's shares were marked down, easing nearly 2 per cent, after the oil and gas group issued full-year results. Some in the market swiftly pinned the weakness on the fact that pre-tax profits, hit by a writedown on exploration spending and lower commodity prices, were down more than 70 per cent. The problem is that the figures were slightly ahead of what some in the City had pencilled in. RBS analysts, for instance, were looking for £54.2m in pre-tax profits, whereas Dana clocked £56.4m. Revenue was also down, but we knew what was coming as the company had already issued an update on production.

A better explanation for the muted share price reaction is that traders were banking profits after a speculative run. Dana is a favourite of the rumour-mongers, who have been pegging their hopes on a takeover approach. Like all good rumours, this one is based on a perfectly reasonable assumption, namely that, in a bid to tackle prospective declines in production, one of the oil majors will swoop on Dana, which offers some tasty assets. The rumours bubble up and subside with some regularity. The shares, in turn, climb and fall back down. That, in our view, is all that happened last night.

Put another way, we don't think there is anything wrong with this company. In fact, the rumours reinforce the fact that Dana is strong. The theories hinge on the quality of its assets, which when valued at the forward oil curve, continue to trade at a significant discount, according to a recent Goldman Sachs circular.

And though it is true that Dana faces some headwinds – Numis, for instance, highlighted the potential downside if UK spot gas prices remain weak – we think that is offset by the scope for gains when the company looks at selling stakes in its discoveries and licences in return for producing assets. As RBS points out, this could drive volumes and "monetise recent exploration successes". Buy.


Our view: Speculative Buy

Share price: 45p (unchanged)

There have been sparks of activity in owners looking to sell their businesses in the retail, leisure and hospitality sectors recently. This bodes well for Christie Group, which focuses on sales of businesses in these sectors, after a dismal two years of pre-tax losses.

To mitigate the impact of the downturn, Christie's took an axe to its cost base, which has resulted in an improved operating loss of £900,000 for the six months to 31 December, compared with a loss of £2.7m for the first half. Further grounds for optimism come from the company saying it passed the bottom of the market in May 2009 and vowing to return to profitability, at the pre-tax level, this financial year. The downside for investors is that they will probably have to wait until next year at the earliest for a dividend, which Christie's halted in 2008.

For 2011, shares in the company, which had the brief of selling hundreds of Thresher's stores in 2009, trade on a price-earnings ratio of 11.7, although the p/e is a vertigo-inducing 81.8 for this year. However, its shares are currently down from a 12-month high of 66p and may be worth a punt if investors believe the chief executive that the worst is over in its markets.


Our view: Buy

Share price: 195.5p (+13p)

Diploma describes itself online as a company that supplies "technical products and services". While you may need a specialised diploma to understand exactly what that rather vague description involves, it turns out that the UK group makes components for a rather diverse set of clients. These involve servicing the life sciences and defence industries as well as seals for construction companies. It even makes parts for groups involved in the glamorous world of Formula One racing.

Diploma's management was bullish yesterday in a trading update. Previously it has said crucial markets had stabilised, and there are "now signs of an underlying increase in trading activity across most market segments". This has prompted predictions that first-half revenues will be up 2 per cent year on year. Profits are now expected to perform even better – following a cost-cutting drive last year – with yesterday's statement saying the numbers would be "significantly ahead" of the first half of 2009. Cash at 31 March will also be in excess of £26m.

Its house broker, Panmure Gordon, upgraded its forecasts by about 8 per cent yesterday, saying that Diploma was attractive relative to its peers at a price of 12 times estimated earnings for 2010. The shares leapt 7 per cent yesterday, dampening our recommendation for investors to go steaming in, especially as the shares have been volatile. Yet the company should offer a decent return over the longer term. Buy.