The Investment Column: BG steps on the gas with hefty rise in production figures

Cranswick; Armour Group
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The Independent Online

Our view: Hold

Share price: 676.5p (+3.5p)

Investors were understandably nervous about holding BG Group stock ahead of yesterday's third-quarter results. Shares in the oil and gas producer trade at a hefty premium to the wider sector, and had the group missed City forecasts they would have taken a pasting.

As it turned out, BG's figures met expectations. Underlying third-quarter profits rose 11 per cent to £342m following a strong operating performance by the company. BG's production jumped 23 per cent to around 547,000 barrels of oil equivalent per day (boepd), compared with the same period in 2005. This came thanks to the start of production at a new field in Trinidad and Tobago and greater output from projects in Egypt.

When this performance is set against that reported by its rival BP last month, it looks particularly impressive. BP posted a fall in both output and profits. Unlike many of the world's oil and gas majors, BG is not struggling to replace its reserves. Analysts estimate the group has sufficient resources to support production for 38 years.

The only blot on BG's copy pad came from a setback in Bolivia. The accession to power of a radical left-winger at the end of last year has resulted in the nationalisation of the South American country's oil and gas industry. About 3 per cent of BG's production comes from Bolivia. Although the policies of the new government will not significantly hamper past deals the group has struck, they will set back any further development of the company's assets there.

Nevertheless, BG had plenty of exploration success elsewhere during the third quarter - namely in the UK and in Brazil. Frank Chapman, the group's chief executive, said that the find in Brazil has the potential to become a major asset.

When quizzed about possible acquisitions by BG yesterday, Mr Chapman said that his company is firmly focused on organic growth, which be believes is the best way to build shareholder value. Although major purchases by BG look to be off the menu, there is always a possibility that a bigger player will make a move on the group. However, even without the prospect of a takeover, BG shares are well worth holding given the company's reserves and the management's track record of delivering growth.

Cranswick

Our view: Hold

Share price: 785p (+23p)

Shares in the food group Cranswick roared to an all time high yesterday following its purchase of Delico, a producer of pre-packed cooked meats, for £17.9m. The price that Cranswick paid for the business certainly seems quite a full one given that it only made a profit of £400,000 in the eight months to 25 August on sales of £12.4m.

But Delico is growing rapidly with sales in the past eight months matching those achieved in the whole of the previous year. Although its profit margins remain low at 3 per cent, they are tipped to improve towards Cranswick's 7.7 per cent as its production capacity becomes better used.

Strategically, the deal makes great sense. It gives Cranswick loads of spare capacity, enabling it to take advantage of the 8 per cent growth in the pre-packed cooked-meats market. Without the purchase of Delico, the group would have had to build a new factory at a substantially higher cost. Cranswick's management know Delico well, having dealt with it in the past, and say that its purpose-built facility in Milton Keynes is one of the most efficient of its kind in the country.

Yesterday's shares price rise leaves Cranswick trading at a slight premium to its peer group. For a company that has an unbroken profit-growth record going back to the early 1990s, this is fully justified.

Armour Group

Our view: Buy

Share price: 39.5p (+4p)

Bob Morton has made a name for himself as a shrewd small-cap operator. This year alone has seen three companies where he had substantial shareholdings taken over - DCS Group and Systems Union, both in the software sector, and MacLellan, a support services group. Mr Morton made a good profit from all three.

However, he has not been so lucky with Armour Group, the home and in-car electronics firm where he has an 18 per cent shareholding and is the chairman of the board. Since the start of the year, the stock has lost a third of its value after a series of profit warnings. Yesterday it posted full-year results which registered a decline in pre-tax profits - to £1.6m from £2.1m - and a fall in cash flow - to £3m from £3.7m.

To blame is the underperformance of Armour's automotive division. It has suffered from lower demand, increased competition and rising raw material costs. However, Mr Morton is not one to tolerate poor results for long, and measures have been taken to cut the division's cost base in a bid to return it to earnings growth.

With Armour trading at just 9 times forward earnings, it is worth betting that he will succeed.

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