The Investment Column: Ashmore may tempt counter-intuitive investors

Charter; Ennstone
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The Independent Online

Our view: Buy

Current price: 247p (-9p)

Investing in emerging market debt might seem like financial suicide at the moment in light of the crisis gripping the credit markets, but yesterday's debut full-year results from alternative asset manager Ashmore Group should tempt some investors to take the plunge.

The numbers came in well ahead of most analyst's forecasts, with assets under management rising $11.5bn (£5.4bn), 57 per cent, to $31.6bn. The sharp increase in assets drove pre-tax profits up to £131.4m, 26 per cent better than 2006 when the company was still privately owned, while net management fees soared 61 per cent to £126.4m.

The one disappointment among the numbers was the performance fee, down from £54.2m in 2006 to just £20.4m this year. Performance fees are a bonus fee on top of regular management fees and are only paid once certain benchmarks are exceeded. Even so, given the turmoil in the credit markets, any performance fee is a creditable achievement.

Ashmore manages its funds through a variety of pooled funds, segregated accounts and structured products, and although the stock listed only last year the company has a solid track record since its formation in 1992 as part of the Australia and New Zealand Banking Corporation.

Yesterday's results were overshadowed by the sale of 26.6 million shares, all previously held by staff. But that should not put new investors off – staff still own more than 68 per cent of the stock, meaning that their interests remain firmly in line with investors.

The speciality financial sector has been hit even harder than the commercial banks, mainly due to the collapse of several hedge funds. But Ashmore does not manage hedge funds, all of its funds are "long only" and even though this is not a low-risk stock, the 25 per cent fall since the market peaked is not justified.

The stock trades on just over 13.5 times forecast 2008 earnings, not exactly cheap but an attractive price given its strong position in a niche market. This is never going to be a stock for low-risk investors, but the global debt market is far more solid than it was in 1998, the last emerging markets crisis, and Ashmore has demonstrated its ability to generate excellent returns for investors over the long term. Retail investors could do much worse than follow the institutions and tuck some away.


Our view: Buy

Current price: 11.8p (+40p)

Brave punters taking a gamble on engineering group Charter back when the market bottomed out in early 2003 have made a bundle; something in the region of 2,300 per cent or thereabouts. But the lottery win for investors is not just down to the bull market – Charter has managed a spectacular turnaround and another set of forecast-busting first-half numbers yesterday suggest there may be even more upside.

First-half revenue rose 10.7 per cent to £691.5m, but improving margins created a 32.3 per cent jump in pre-tax profit to £92.1m, well ahead of even the most bullish forecasts. Earnings per share rallied by more than 25 per cent to 43.3p and the company has net cash of £60m, adding to a very strong balance sheet that carries virtually no debt.

Charter runs two main businesses – Howden, which designs, supplies and maintains air and gas handling equipment, and ESAB, a manufacturer and supplier of welding and cutting equipment. The business is truly global, operating across Europe, the Americas and in emerging markets. The only disappointment in the results was a fall in revenue from China, but that was well flagged and the company expects the country to return to more normal growth rates after investing heavily in its domestic power structure.

Looking ahead, Charter's exposure to the construction, shipbuilding and power generation sectors should mean that it is relatively defensive unless there is a major economic slowdown in the US. The stock trades on 13.7 times forecast 2008 earnings, attractive enough but that number will come down as analysts upgrade forecasts. Charter is no longer being given away, but this business is in superb shape even with a dollar headwind. Although there is little in the way of a dividend yield, for growth investors Charter is a must have. Buy.


Our view: Risky buy

Current price: 43p (-1.5p)

Thanks to global consolidation that culminated in the takeover of Hanson earlier this year, Aim-listed Ennstone is now the last publicly-owned aggregates group left in the UK.

First-half profits fell 2.2 per cent to £5.26m, broadly in line with expectations, despite a 19 per cent rise in revenue to £112.75m, although underlying profit rose in line with revenue. The weak dollar was largely responsible for the profit shortfall. The results were also impacted by a £3.7m loss on discontinued operations and £600,000 in redundancy and reorganisation costs.

The company has aggregate reserves in Scotland, Poland and the Eastern United States that should last another 25 years at current rates, with the potential to make that last a further six years through successful planning applications. With the global market dominated by a handful of major players, there is every chance that someone will come knocking at Ennstone's door sooner rather than later.

Even so, the stock trades at over 15 times forecast 2008 earnings, a rich valuation given the ongoing dollar weakness and uncertainty over its US operations. But the business is making good progress in restructuring, recently raised £50m of new capital and prices are working in its favour. As an asset-based business there is room for upgrades to the valuation. Worth a punt.