The Investment Column: Imperial Energy offers a fine buying opportunity

Psion; Petra Diamonds
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Our view: Buy

Current price : 1,081p (-115p)

Imperial Energy is walking a bit of a tightrope – turning down an approach from the Russian gas giant Gazprom is a brave move, even if, as far as shareholders are concerned, it is clearly the right one. But in the Russian natural resources game everyone is on a tightrope and it pays not to upset the locals.

Gazprombank approached Imperial at the start of the month, asking it to issue 25 per cent more equity that Gazprombank would buy at a discount to the market price. Although no price was disclosed, it is fair to assume Gazprom wanted the stake at a significant discount to the prevailing market value.

Imperial was for a while the largest company on Aim, but moved up to the full market back in April. It joined the FTSE 250 index yesterday, and its assets in western Siberia give it the largest reserves of any independent exploration and production stock, some 802 million barrels.

Production only began in September, but Imperial is already churning out 8,500 barrels a day, and it should comfortably make its year-end target of 10,000.

From here, it seems that Gazprom was chancing its arm, hoping that its size and influence would force Imperial into giving it a substantial stake in an exciting business at a very attractive price. No such luck, but, rather than walking away in a huff, Gazprom is interested enough in Imperial to stick around.

The two companies plan to co-operate in unspecified future projects, a clear sign Gazprom sees enough in Imperial to pursue a relationship, despite having its initial offer rebuffed. Imperial's shares have fallen by almost a third since the start of the month, notwithstanding the surging oil price and the confirmation of the Gazprom offer.

While a full bid may not be likely in the short term, turning down Gazprom's offer shows that Imperial's management is not going to agree to any deal that is not beneficial to shareholders. If Gazprom wants to make a more attractive offer, it should play ball and do it at a premium to the prevailing share price.

With the stock trading on just over 30 times forecast 2008 earnings, it is not exactly cheap; but, given its reserves, the favourable oil pricing environment and its attractions to larger players, it is not too expensive and that ratio is forecast to fall dramatically over the next few years. This is an excellent buying opportunity.


Our view: Sell

Current price: 102.5p (-20.5p)

Psion, once a stalwart of the UK hardware industry, remains one of the last vestiges of a sector now dominated by much larger US and Asian rivals.

It has been a tough few years for the portable computing device manufacturer, to put it mildly, and, since it sold out of its mobile phone operating system developer Symbian, Psion has struggled to capture the imagination. Meanwhile other UK hardware players such as Sendo and Amstrad have been acquired by much larger companies and have been quickly forgotten.

The October launch of the iKon device – a super-tough PDA-style smartphone that can be dropped on to concrete from a great height without feeling any ill-effects – triggered some excitement that Psion could still be a force to be reckoned with in the mobile device market.

But investors hoping that the share price may start heading the right way woke up to a nasty shock yesterday after the company said sales in the US – where it derives around a third of its sales – would fall 8 per cent due to delayed orders, particularly in the transport and logistics industries. With growth across its other regions also lower than analysts had pencilled in, the shares tanked 15 per cent.

Predictably, analysts slashed forecasts despite the company's positive comments about the potential for iKon sales in 2008. At 110p, the stock trades at 13 times Panmure Gordon's downgraded forecasts for 2008, a relatively undemanding valuation. However, the company has a lot to do to offset the weakness in the US and, with the current economic uncertainty hitting business confidence, it appears unlikely that companies will be rushing out to upgrade their rugged mobile computing devices any time soon. Sell.

Petra Diamonds

Our view: Buy

Current price: 148.5p (+6p)

Cullinan, the mine that produced the Great Star of Africa, the centrepiece of the crown jewels, is soon going to find itself in Petra Diamonds' jewellery box.

A consortium led by the company and including Al Rajhi Holdings and Black Economic Empowerment (BEE) partners, a group of local stakeholders, announced an agreement to acquire the mine from DeBeers yesterday for $149m (£72.3m).

The consortium will be funded by $50m from Petra, which has a 37 per cent initial interest, and $150m from Al-Rajhi, which also has 37 per cent, with the excess cash going into the mine's working capital and Capex requirements. BEE has a 26 per cent interest in the consortium and will fund its way from future cash flow from the mine.

The acquisition is good news for Petra. It will make the company one of the world's top ten diamond producers, giving it an option to take their interest to 60 per cent, subject to payments and the redemption of Al Rajhi's loans.

On top of current production, there is an unexploited Centenary Cut resource below the operating mine, which, by itself, is expected to be active for another decade. In addition to bagging a prestigious resource, Petra has essentially taken out an option on what is potentially the next big thing.

The transaction is expected to take around six months to complete and therefore will only impact earnings next year. Even so, the market for diamonds is unlikely to dry up any time soon, so Petra could sparkle over the next few years.