The Investment Column: Emerging economies give Ashmore a strong hand

UK Coal; Ark Therapeutics
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The Independent Online

Our view: Hold

Share price: 251.75p (+1.75p)

Mark Coombs, the chief executive of Ashmore, netted £170m from the float of the emerging markets asset manager in October. But, does his cashing in mean that this is as good as it gets for Ashmore or is there more upside for investors?

First, it is important to note that Mr Coombs, and the company's staff, retain a 68 per cent stake in the group so they are all incentivised to keep the profits rolling in. And yesterday, Ashmore issued solid trading update to the City, showing that this is exactly what is happening. It boasted of a 33 per cent rise in the amount of money it has to manage to $26.8bn in the six months to the end of December, leaving Ashmore on course to deliver around £100m in profits for the year to the end of June 2007.

Since it was set up in 1992 as a division of Australia and New Zealand Banking Group, Ashmore has enjoyed tremendous growth.

Back in those days it had little more than $10m to manage. The strong returns the asset manager has been able to deliver for its investors in recent years have been thanks to the re-rating of emerging country debt.

Six years ago, only 2 per cent of emerging country government debt was investment grade. Now credit rating agencies rate half of emerging debt at investment grade or better, a state of affairs that is unlikely to be reversed anytime soon. In fact, some emerging countries look to have stronger economies that many EU members.

The question facing those interested in Ashmore now is does the group deserve its present stock market valuation? The answer to this is probably yes.

Its shares trade at a near-20 per cent premium to the wider fund management sector. Ashmore enjoys above average earnings growth, as well as high cash generation, which leaves plenty of room for increased returns to its shareholders. All this makes the stock worth holding, but investors should not expect any dramatic performance in the short term.

UK Coal

Our view: Hold

Share price: 417p (unch)

UK Coal owns what is left of England's coal industry. In fact, the company produces around a fifth of the coal the country burns every year. These days, however, the City is not really very interested in the group's mining operations. It is UK Coal's property portfolio that has got the investor pulses racing.

As yesterday's trading statement showed, the group's coal business is in a poor state. For the year to 31 December 2006, the Doncaster-based firm will post a pre-tax loss of £33m which, although an improvement on the £62m deficit it revealed in 2005, is still pretty bad. In the year just gone the business has suffered from production problems at two of its remaining deep mines and legacy contracts which mean it gets much less than the market price for coal.

However, UK Coal's property portfolio more than makes up for this. It owns 50,000 acres of land which constitute one of the biggest brownfield land banks in the country. Over the next six years the group plans to develop a part of this to provide 14,000 new homes and over 25 million square feet of industrial and office space. Most of the vacant land is on disused open cast and deep mine sites along the M1/A1 corridor from Newcastle to Leicester. Re-development work has already begun at a site near Sheffield.

Management yesterday said the current worth of its land bank is £343m, but once it is fully developed this figure could rise to well over £800m. Given that the whole of UK Coal (including what is left of its coal business) is valued at £660m, the stock is well worth holding.

Ark Therapeutics

Our view: Worth a punt

Share price: 132p (+13.25p)

Ark Therapeutics is leading the way in gene therapy. The healthcare company specialises in vascular disease, wound care and cancer - all growing markets with opportunities for new products to generate high rewards.

Ark's treatment for brain cancer, Cerepro, which is in final stage trials, has no competitors and is set to be the first gene-based therapy medicine on the market outside China. The company also recently signed a series of marketing deals for its wound dressing Kerraboot.

Its other key product, Trinam, is now also about to enter phase-three trials following a better-than-expected meeting with the US Food and Drug Administration on its second-stage trials. The FDA ruled that the drug will now only need a single phase-three trial - relatively small with around 250 patients - before it heads for market approval.

Trinam is a therapy designed to prevent blood vessels blocking in kidney dialysis patients who have undergone surgery. If all goes well it could reach the market in late 2009 and analysts are forecasting potential sales of £450m.

Shares surged 11 per cent - up 13.25p to 132p - yesterday on the back of the announcement, leaving the company with a market valuation of around £220m.

Fund management giant Fidelity recently invested in the company and currently holds a 4 per cent stake. It has also been given warrants to buy further shares at 140p which highlights their belief the stock has considerably further to go.

With approval of Cerepro scheduled for spring this year and further upside expected from Trinam, it's worth a punt.

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