The Investment Column: Cairn to reward long-term investors

Aberdeen shakes off split caps debacle; Hold on to plasterboard firm for solid growth
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The Independent Online

The price of crude oil will remain above $38-a-barrel for the rest of the decade, according to CSFB, the latest broker to adjust its forecasts yesterday. With demand from industrialising and industrialised nations set to stay high, and with slowing production in Russia and tight controls within Opec, that seems a pretty fair bet now.

The price of crude oil will remain above $38-a-barrel for the rest of the decade, according to CSFB, the latest broker to adjust its forecasts yesterday. With demand from industrialising and industrialised nations set to stay high, and with slowing production in Russia and tight controls within Opec, that seems a pretty fair bet now.

And yet even CSFB cannot bring itself to recommend buying Cairn Energy shares.

Cairn has had an extraordinary few years, buying a block of land in north-western India from Shell and then discovering it was sitting on at least a billion barrels. The shares soared, inevitably beyond levels that could be entirely justified by the drilling progress to date. Equally inevitably, a disappointing drilling result in December sent the stock down by a fifth. Its six-month sojourn in the FTSE 100 is now over, but the company is still valued at £1.88bn.

That seems a much fairer price, although it is predicated on some further extension of Cairn's proven reserves. Appraisal drilling of the Mangala and N-A fields is complete and production is targeted for the tail end of 2007. Work on the area's other three finds, codenamed N-C, N-V and N-R, has become the focus of investor interest now, and there was good news yesterday from N-V where the latest appraisal is that this is a significant oil field. Investors need to remember that estimates of recoverable oil can go down as well as up; the share price tumble in December was the result of a downgrade to estimates of the size of the N-C reserves. Cairn, despite its size, is a speculative investment, not one for the pension fund.

The established oil and gas business has also had its troubles, with production declining as expected, and the Indian government demanding higher taxes, as not expected. Profits will be depressed by the capital expenditure commitments in the new Indian fields for most of the rest of the decade.

After the correction, stagnation is likely in the share price for some time, but existing shareholders should hold on for the long term.

Aberdeen shakes off split caps debacle

Aberdeen Asset Management is a very different company to the wreck that came close to breaking up in 2002.

The fact that it is still around at all, after the damage to its reputation caused by the split-capital investment trust debacle, is not far short of a miracle. It has sold the main part of its retail unit trust business, as well as half of its property business, and has got down to focusing on its institutional division. Here, a growing number of clients have been willing to see past the bad publicity, to seek out Aberdeen's proven fund management skills, especially in the Far East.

Having paid £78m in split-cap compensation and admitted that its retail brand may be damaged irreparably, the group has set its sights only on reaching retail investors through the funds of funds and discretionary portfolio management markets - both of which are growing faster than the direct market in any case.

The horizon is not yet clear of potential problems, however. A looming legal action with one of its former investment trusts could yet squeeze out a little more bad publicity for the firm. And a big slug of preference shares - issued as part of the group's debt restructuring - will convert into ordinary shares in 2007, which could be dilutive or costly if Aberdeen's current rate of progress has not been kept up. Nevertheless, in the context of the troubles Aberdeen has survived in recent years, these worries are minor.

The shares have rallied in recent months, and have already doubled since last May, but there is plenty more room for improvement here, albeit at a slower pace. Buy.

Hold on to plasterboard firm for solid growth

The limestone put into coal-fired power stations to soak up carbon dioxide and cut emissions has a useful by-product: gypsum, which is used in plasterboard, which is used in most modern construction. Which is why BPB is building its new plasterboard factory next door to one of the US's biggest power plants, in West Virginia.

BPB said yesterday that it is expanding capacity in the US to take advantage of the good growth in demand for plasterboard, or wallboard, in the US. It is all of a piece with a bullish trading update earlier this month which predicted that underlying pre-tax profit would rise 28 per cent in the year to March, with North American operating profit up by a whopping 70 per cent.

Demand for plasterboard is linked to economic activity, but long-term growth is likely to slightly outpace economic growth. It makes a lot of construction work cheaper and easier than older methods.

BPB is a global player already, but it is using its strong cash inflows not just to invest in extra US capacity but to expand in Asia, in particular India, Thailand and Malaysia. It does mean the dividend is not as generous as investors might like, though, yielding about 3 per cent. At 506.5p, down a ha'penny yesterday, the shares are valued at 13 times current year earnings. Hold.

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