The Week In Review: Cookson defies the forecasters

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The Independent Online

To think that a few years ago Cookson was teetering on the brink of collapse. Then, the group was struggling under a £750m debt burden after betting heavily on becoming an electronics equipment maker.

This week, it marked its return to corporate health with its first dividend payment since 2001. It also unveiled a 20 per cent jump in annual profits to £101m, said it had reduced its borrowings to £290m and doubled top-up payments into pension funds.

This renaissance has been thanks to a radical restructuring programme which has seen the company make key disposals, focus on providing materials and parts to the steel, glass and semiconductor industries and move its production facilities to emerging countries such as China, India and Brazil.

Cookson has had to move to such faraway parts of the world because the companies it supplies have done so. A happy by-product of this has been a fall in labour costs which has boosted the company's profit margins.

After the latest forecast-busting figures, brokers upgraded predictions for the current year, leaving the stock trading at just 12 times' forward earnings, a substantial discount to the wider engineering sector. Buy the shares.

SHORE CAPITAL

Shore Capital, the boutique investment bank, has raised £185m to buy homes in Berlin. Apartments there cost around a tenth of the price of London per square foot, and less than in Budapest, Prague or Warsaw. However, cheap mortgages and an influx of Germans into their capital make the property market ripe for a boom. Buy.

JKX OIL & GAS

The companyhas announced its 2005 pre-tax profits more than doubled, to $51m, and so have its pay-out to shareholders. The company trades on a rating of just 12 times forecasts earnings for this year. This is too low a rating for a quality player like JKX. Buy.

GUINNESS PEAT

In the 13 years since its inception, the activist investor Guinness Peat Group (GPG) has delivered average compound growth of 18.1 per cent while the FTSE notched up 9 per cent and Buffett's Berkshire Hathaway 17 per cent. The latest figures revealed a £30m rise in net profit to £97m. A big chunk of this was accounted for by the impressive turnaround GPG has engineered at the thread maker Coats. Thanks to GPG's reforms, Coats delivered a profit of £25m in 2005 compared with £4m in 2004. GPG has an awesome track record of spotting undervalued investments and unlocking that value. Buy.

SMG

A few years back, an acquisition splurge left SMG with huge debts, just as the stock market bubble burst and the advertising market took a nosedive. Since then, the media group has sold off businesses including its newspaper operations, reducing debt to manageable levels. Now things were coming right on the trading front too. Last year, group profits gained 46 per cent to £20m. SMG shares, at 83p, offer upside. Buy.

HISCOX

After the most costly hurricane season on record last autumn investors were fairly impressed to see Hiscox unveil pre-tax profits of some £70m this week. Though Hiscox is now well placed to take advantage of the rise in catastrophe premiums - which have inevitably rocketed since the storms - the most exciting part of the group's business in the immediate future is its non-Lloyd's division, where profits have been booming without any growth in sales. This business is centred on writing insurance for high net worth individuals and, since we last tipped this stock 18 months ago, the shares have risen 50 per cent. Hold.

CANDOVER

Candover Investments is one of the few routes for private investors into the big European private equity scene and returns over the last three years prove just how lucrative an asset class private equity has been. It is hard to justify buying an investment trust that trades at a 21.2 per cent premium to net assets. However, if the private equity industry can continue to deliver results approaching 20 per cent a year, as it has done for most of the last decade, there is more upside left. Candover shares have more than doubled in the past four years, but, given the management's excellent track record, buy.

PRUDENTIAL

After Prudential's better than expected annual results yesterday, it barely resembles the basket case which surprised the market with a £1bn rights issue 17 months ago. With new CEO Mark Tucker having been in his post for 10 months, the group is sailing steady again. Although much of the groundwork for today's success was laid before Tucker arrived, the new CEO must be given credit for resolving some key questions very quickly. The shares are up more than 25 per cent since we tipped Pru last October, and while its valuation is now more demanding, the stock remains a good long-term bet. Buy.

GONDOLA

From a distance, Gondola Holdings, which owns the Pizza Express restaurant chain, seems to be doing all the right things. Its interim results revealed a 7 per cent rise in earnings before interest and tax to £38.7m, a 4 per cent jump in like-for-like sales and maiden dividend of 2.3p a share. Even so, risks remain. It has far too much debt for a start, and an economic slowdown could quickly leave the company's balance sheet looking very stretched. Avoid.

ARMOR GROUP

Twenty years ago ArmorGroup would have been described as a mercenary outfit. Today it is a "protective security services" company. The group aims to cash in on the world's war zones and trouble spots. Trading at nine times' forward earnings, the shares are by no means expensive but given the risks to the group's earning they are best avoided.

This reconstruction project is still far from complete

Over the past six years Amec has turned itself from a bog standard construction company into a specialist engineering services group.

The next step will see the group split its remaining operations into two companies - engineering services, which does things like design oil rigs, and a UK infrastructure operation to house Amec's private finance initiative (PFI) investments.

The exact mechanism by which this will be achieved is not yet clear. A separate quote for the infrastructure unit is possible as is an outright sale of the business.

The engineering services business will focus on the energy sector. For now that seems a smart strategy. These days companies involved with providing support to the oil and gas industry are enjoying record growth.

However, until it becomes how much Amec's various disposals are going to raise, the group's shares are best avoided. Although it posted a 7 per cent rise in profits to £124m, debt, at £420m, is too high.

m.jivkov@independent.co.uk

The above recommendations are taken from the daily investment column

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