The Week In Review: Giant-killer Xstrata looks to mine rich new vein in assets
Saturday 14 August 2004
Xstrata is a work in progress. It floated in 2002 after buying many mining assets and the chief executive, Mick Davis, is intent on building a diversified group to take on the giants of the industry.
After the transforming $3bn (£1.65bn) acquisition of MIM last year, he has extended the portfolio of assets from thermal coal into coking coal and copper, and reduced dependence on South Africa. Now he is looking in South America for a player with big reserves of copper.
On current reserves, Xstrata runs out of this increasingly precious metal next decade.
The acquisition of MIM is bedding down well, Xstrata's results showed recently, with efficiency improvements coming through. The demand for copper from China has pushed the metal's price sky-high this year, and Mr Davis said high commodities prices are set to continue next year.
While the Chinese growth story is a long-term one, there could be a wobble next year and there may be better times to buy into the mining sector. Xstrata is returning cash to shareholders rather than rushing to acquisitions at a possible cyclical peak. But the shares, at close to their best levels since flotation, still sit at an appropriate discount to the less risky miners.
Will the sound of Matt Lucas, of Little Britain fame, singing V-I-M-T-O to the tune of D-I-S-C-O be enough to make the historic fruity drink cool? It is difficult to imagine so but Nichols, the company which makes it, does not need to have a cool brand to be a cool investment. Vimto is holding its market share and is also big in the Middle East. Nichols has been conducting long-overdue restructuring these past couple of years, with redundancies and, now, a plan to sell its less profitable foods business, which is too small to stand the price cuts demanded by its customers, including the supermarkets. The shares promise a dividend yield of more than 6 per cent, underpinned by strong cash flows from the soft drinks business. Buy.
THE INNOVATION GROUP
Eighteen months on from the rights issue that rescued The Innovation Group from dot.com bust, the software group is a focused, cash generative company. It has scaled back to concentrate on software and services which help improve efficiency in insurance and related industries, and has an impressive list of clients which includes Royal & SunAlliance, Axa and BMW. But the company is not growing. It has lost a significant customer for its outsourced insurance services division, and it is proving hard to replace the work. We told investors to hang fire in February when the sales recovery was in its earliest days. The slower than expected progress since then justifies keeping one's powder dry still.
Xenova thinks it might have found a vaccine to cure addiction to cocaine and smoking. But in a stock market sector that swings between hype and despair, investors need to wait for trial results or a licensing deal to a big drug company before judging if a biotech venture has hit the jackpot. Xenova is the UK biotech industry in microcosm, a dogged survivor which has seen a series of products fail to meet their promise but which has done enough in the way of mergers, cost cuts and fundraisings to give it cash for two more years at the casino. Results from trials of its brain cancer drug won't be out for more than a year, so gamblers need not hurry to place their bets.
Since listing in London in 1999, Old Mutual has been on a chaotic shopping spree in pursuit of its aim of creating a financial services business which is balanced evenly between the UK, US and South Africa. Today, it still generates about three-quarters of its profits from its home market, and the acquisitions it has made in the UK and US have proved unsuccessful or difficult to integrate. It is a collection of so many businesses that one is left wondering if even the board has its finger on exactly what is going on. With the potential to spring a nasty surprise, this stock is one to avoid.
Mike Parton, the chief executive, has arguably done the easy bit in paying down debt and re-focusing the historic telecoms equipment company. Now he has to deliver a compelling growth story. Currently he is sticking to his prognosis of low, single-digit sales growth for the year to March 2005. While this is no doubt prudent, the share price will be moribund if it doesn't get more exciting than this. The most obvious and visible source of medium-term growth is investment by telecoms operators, such as BT, in new network technology. When orders start to flow over the next few years, Marconi will benefit in terms of sales, but just how profitable these orders will be in an intensely competitive market, is another question. Avoid.
From the man who brought you tie-dye T-shirts in the Madchester era, and created ukbetting, the sports websites company, in the dot.com boom, comes a new venture for the broadband generation: Pipex Communications. Peter Dubens has turned Pipex into the number five broadband service provider in the UK, thanks to seven acquisitions. It is also adding 2,000 broadband customers of its own each month. Pipex is one of The Independent's stock tips for 2004 and we are still confident that new buyers will make money.
Affordable housing is one of those terms, like military intelligence, that invites a grim joke. But it is also a term that politicians of every hue have rallied behind, with myriad schemes to promote the building of cheap accommodation. And it is the foundation on which the construction group Morgan Sindall, which sullied its reputation with a profit warning in 2002, has rebuilt its standing with the City. It builds the mixed housing projects which include council rental accommodation alongside some low-cost homes for sale. With a 4 per cent dividend, the shares are a hold.
Gloom clouds Sun's outlook
Royal & SunAlliance faced insurance pay-outs on the 11 September attacks on one side of its business, falling confidence in the life insurance industry on the other, and collapsing stock markets affecting both.
It has been a rough few years for shareholders. Now the company has sold its life insurance business at the bottom of the market, to concentrate on a general insurance industry that looks to be past the top of its cycle. It is not going to get much easier even from here.
Reshaped RSA is a well diversified general insurer, operating in both the commercial and personal insurance markets across the UK, US and Scandinavia. But continued uncertainty in the US, where RSA's costs have soared, could dog the group for some time. Asbestosis claims continue to flood in, and it is unclear whether RSA will be forced to pay yet more for the New York World Trade Centre loss.
While the company's capital position looks much more stable, thanks to the £850m sale of the life business last month and a £960m rights issue at 70p last year, there is now the threat of tough competition leading to falling insurance premiums. This could eat into RSA's currently healthy margins.
Management is confident premiums will stay high, if not at their high point, for a while to come, and after the recent drift in the group's share price RSA is arguably undevalued on a shorter view. For those who are looking to exit there could be a better opportunity than at present.
But this stock is not easy to commend for the long term. New investors looking for exposure to the insurance sector should look elsewhere unless they have a very strong appetite for risk.
The above is a selection from the daily Investment Column
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