The Investment Column: International Power is worth a hold while prices remain high

Spirent; QXL Ricardo
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The Independent Online

Our view: Hold

Share price: 316.5p (+10.25p)

International Power goes from strength to strength. Yesterday the power generator served up a forecast-busting set of first-half figures thanks to sky-high electricity prices, and talked of more growth to come.

Pre-tax profits at the group soared 96 per cent to £280m, while sales rose to £1.8bn from £1.2bn, as its operations in the US, Europe, Asia and the Middle East all put in strong performances. Even the most bullish City analysts did not expect profits to exceed £260m. Of International Power's European portfolio, its UK assets did particularly well. Earnings from its Saltend plant leapt as wholesale electricity prices hit record highs.

Power prices vary greatly throughout the world. High prices in the UK and US are a product of the soaring value of oil and gas. Philip Cox, International Power's chief executive, forecast this state of affairs to continue for some time. He also talked about the company's eagerness to complete acquisitions. Mr Cox would not be drawn on any specifics, but insisted that he was looking at opportunities across the company's portfolio.

International Power has interests in 37 power stations in 17 countries and last year produced 16.6 giga-watts - enough power to light more than 220 million light bulbs at one time.

As with its annual results in March, the performance of company's Australian operation was the only blot on its copy book. Profits fell by £6m to £64m, but Mr Cox suggested that an improvement could be on the way.

Trading at 15 times forward earnings, International Power shares look to be a good bet. However, the group is very exposed to any drop in the price of electricity prices in the US and UK.


Our view: Avoid

Share price: 43.25p (+1.75p)

Investors in Spirent have had a rocky few months.

First came June's profits warning, which hit the share price hard. Inevitably, the lower price led to often-repeated rumours that the company had received a takeover approach from its rival Agilent Technologies.

Then, earlier this week, it emerged that the activist shareholder Sherborne Investors has built a near 10 per cent stake in Spirent, a telecoms testing equipment developer. This piles further pressure on its management team.

Nevertheless, the chief executive Anders Gustafsson was in an upbeat mood after yesterday's first-half results, which revealed a 9 per cent rise in revenues to £138.2m and improved margins.

Mr Gustafsson was cautious about the company's performance in the second half of the year. Spirent will continue to suffer as some of its largest customers merge and thus hold up investment in new testing technology. However, after the effect of customer consolidation washes out, Mr Gustafsson expects a "healthy year" in 2007 as its testing products gain traction.

The performance of TestCenter, a product that has already attracted 90 customers since it launched two months ago, shows that the demand for quality testing products is strong. As a result, the company has spent up to £4.4m acquiring Imperfect Networks to bolster its product set.

Sherborne will have almost certainly bought into Spirent with one eye on the company's £150m cash pile as well as the prospects for a recovery.

However, although the group trades at a discount to its US peers Agilent and Ixia, investors would do well to wait for more evidence of an upturn before buying.

QXL Ricardo

Our view: Hold

Share price: 9,100p (+499p)

QXL Ricardo shares returned from suspension yesterday as the online auctioneer heralded the end of a long-running legal dispute with the management of its key Polish business.

The battle, which started in 2002, was certainly bitter. QXL Ricardo accused the Polish management of having "stolen" the business by issuing extra shares to themselves. This ploy is very common in eastern Europe and Russia. Because the legal system in this region is weak and chaotic, those who have been disenfranchised can spend many years trying to win back control of their company.

QXL Ricardo took a pragmatic approach to its problem in Poland. It decided to cut a deal with the local management whereby they were given a 20 per cent stake in the listed company in return for getting the asset back.

Had QXL Ricardo persisted through the courts, it is very probable that the issue would have remained unresolved for many more years.

Retrieving the unit turns QXL Ricardo into a company that would have made a profit of £9.3m last year as opposed to the £2m it reported.

Running online auctions is a fast-growing business. QXL shares, which trade at 27 times earnings, are worth holding.