The Investment Column: Dana Petroleum's prospects make it ripe for a takeover

Chrysalis; Theo Fennell
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The Independent Online

Our view: Buy

Share price: 1,262p (+76p)

Dana Petroleum has a very busy six months ahead of it. The oil and gas explorer is expected to have drilled at least five wells in Mauritania and Kenya by April and, according to a note from Merrill Lynch yesterday, their potential is not yet priced into Dana's stock price.

The first of these, Aigrette, in offshore Mauritania, is being drilled and results are due within a fortnight. However, it is a series of wells in offshore Kenya - Pomboo and Sokwe - that have more potential.

Alongside this, the US broker expects Dana to complete a series of asset swaps with Gaz de France in the months ahead. It believes these will see the group gain exposure to an exciting field in Egypt plus acreage in a North European country, probably Norway. Doing asset swaps has paid dividends for Dana which is on the way to achieving its 40,000 barrel-a-day production target by the end of next year. Merrill says work on the new north European wells is due to start early next year and will carry a materially lower risk than the sites in Mauritania and Kenya.

The group's existing reserves and portfolio of prospects make it a prime candidate for takeover by a larger player.

Chrysalis

Our view: Buy

Share price: 128.5p (+3.5p)

The radio and music publishing group Chrysalis has been on a charm offensive in the City this week. The focus of its presentations in the Square Mile has been its music publishing division which seems to be enjoying something of a renaissance.

This has been driven by a strong release schedule including artists such as Gnarls Barkley, the Raconteurs, the Yeah Yeah Yeahs, Feeder, Nerina Pallot and Ray LaMontagne. Because of the time lag in collecting income, the benefit of this impressive schedule is expected to be felt over the next two years. However, analysts are already talking about possible upgrades to Chrysalis's earnings forecasts.

Its catalogue of artists makes the company a leading independent music publisher. But lying within the Chrysalis group, it looks to be seriously undervalued. Numis Securities estimates that the business is worth £180m as its stands and up to £220m if sold to a bigger player. This is because by combining it with an existing operator significant operational costs can be removed.

At yesterday's close, the whole of Chrysalis was valued at just £210m. That includes the company's radio assets. Although they have been in the doldrums for some time they have outperformed rivals and are well placed to stage a recovery should the UK advertising environment improve.

In 2005, Chrysalis suffered a sizeable loss at the pre-tax level. This year it is forecast to return to the black to the tune of £5m, rising to £7m in 2007. This leaves the group's stock trading at a whopping 50 times forward earnings. However, on a sum-of-the-parts basis (where the group's music publishing division alone can justify the current market capitalisation) the shares look to offer good value.

Theo Fennell

Our view: Hold

Share price: 91p (+17p)

Had readers followed the advice of this column and bought into the upmarket jeweller Theo Fennell earlier this year, they would be sitting on a 75 per cent capital gain. Yesterday, shares in the group hit fresh highs after it unveiled a 35 per cent rise in first-half sales.

After the trading statement, brokers predict that profits at Theo Fennell would hit £1.25m in 2006 up, from £1.1m last year, showing that the luxury designer is able to buck the malaise in the wider retail sector. The group operates from a mixture of company owned stores, concessions and franchises, and also has a wholesale business supplying department stores. Some of its jewellery sells for £50,000 plus a pop.

Theo Fennell's ambition is to become the No 1 player in the world at the luxury end of the market. It already has bigger sales than Garrards, Asprey and De Beers' retail arm, and boasts a presence in the UK, Dubai, Hong Kong and Russia. Yesterday it once again trumpeted plans to expand into the US.

So far the group has grown organically. In the past it has been approached by external investors offering cash to help it speed up this growth rate. Should it opt to break into the US by opening stand-alone stores, as opposed to concessions or franchises, it will have to take up such an offer.

For the time being, however, the company is firmly focused on the run-up to Christmas. Beforethe festive season it has launched new products and expanded its presence in Hong Kong and Dubai. If it has a good Christmas, current earnings forecasts will almost certainly be too conservative.

Now is not the time for readers to be thinking about taking profits. Hold on for more gains.

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