Time to take profits at highly-valued BG

Something is still missing at the rechristened Brown & Jackson
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The Independent Online

Edited by Stephen Foley

Why is BG Group hoarding its cash? The gas and oil exploration company raised £1bn from the sale of its stake in a Caspian Sea oil field back in the spring, but it hasn't paid back any of its long-term debt with the cash, and it was refusing again yesterday to countenance giving it back to shareholders any time soon.

The stock market is always wary of aggrandising acquisitions, which could well be on the cards. BG has come a long way since it was the North Sea-focused production arm of the privatised British Gas. It has been forced to look more widely for assets, since the easy-to-reach North Sea gas is running low, and is bringing on-stream some impressive fields in Egypt and Canada. Its production growth prospects put most of the oil majors in the shade, but it remains a relatively small player.

BG talks of the need to maintain "flexibility" to justify its apparently inefficient hoarding of cash. The market could support a big acquisition, but it is always a risk. As for the other potential need for the capital, namely a big step-up in spending on the development of new wells, that too could be disappointing - as BP found on Tuesday when it said it would cost more to tap more complicated oil fields. Already, yesterday, there was evidence of unexpected costs in the development of its nascent liquefied natural gas operations. BG is speeding up this development in the expectation that this method of transporting gas as a liquid will make the fuel an increasingly significant alternative to oil.

It might seem churlish to concentrate on these vague nerves when BG has such a strong operational track record and when the company has just put out a storming set of quarterly results.

Profit after tax was £275m in the three months to 30 June, up from £192m in the same quarter last year. That was driven by an 8 per cent increase in production and a strengthening of gas prices. These are linked to the oil price and look set to stay high, if perhaps not quite so high, for the foreseeable future.

The reason the nerves are important is that BG shares look pretty fully valued on most measures of the worth of its current assets and as a multiple of cashflows and earnings. The market is putting a high value on the production and sales growth to come, despite the risks of disappointment, particularly in the new liquefied natural gas operations.

BG shares are trading within pennies of their all-time high and now is a good moment to take profits.

Three years into his role as chief executive and Angus Monro has finally laid the ghost of Brown & Jackson to rest. Shareholders agreed to rechristen the group ...instore (yes, including that annoying ellipsis) at yesterday's annual meeting.

Instore is the successor for Poundstretcher, the one part of the Brown & Jackson empire that Mr Monro took on when he joined. the peripheral businesses, such as What Everyone Wants, were sold off for a nominal sum and eventually put into administration. The group decided the old Poundstretcher brand was too downmarket, so is busy replacing the 201 remaining sites with its new and slicker ...instore format.

One-third of the estate - 109 stores - already trades as ...instore, but investors would be forgiven not for noticing. The new format is performing only "slightly better" than the remaining Poundstretcher, although it does have stronger margins. It's a moot point as to whether ...instore works better than an existing brand that, in the words of the old Ronseal advert, does what it says on the tin.

Mr Monro has had his work cut out to rebuild the entire business, including a new distribution centre funded with a deeply discounted rights issue.

Yesterday's trading update showed the group is on the turn, with an 8 per cent increase in like-for-like sales in the past eight weeks. For the 21 weeks to 23 July, underlying sales were down 2.7 per cent. Margins were much stronger, too, but on 17.8 times earnings, the shares are too high. Sell.

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