The Investment Column: JKX Oil dogged by reserves uncertainty and price premium

ArmorGroup; ACP Capital
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The Independent Online

Our view: Avoid

Share price: 298p (-9p)

Annual results from JKX Oil & Gas yesterday made great reading for the group's shareholders. Both its profits and dividend doubled thanks to strong oil and gas prices. The bulk of the JKX's production is in the Ukraine. Although prices here are around half the level seen in Europe they are increasing at quite a pace which is great news for the FTSE 250 group. Last year alone domestic gas prices in the Ukraine rose by 55 per cent.

For the year to 31 December 2006, pre-tax profits soared 113 per cent to $109m (£55m), sales gained 59 per cent to $131m, allowing JKX to double its dividend to 2.2p a share.

However, not all is rosy at the company. It needs to replace its reserves which at the last count stood at just 44 million barrels of oil equivalent. JKX can, of course, do this by finding more oil and gas. It has plenty of projects on the go. For example, the market expects an update from the group's field in Bulgaria next month. The onshore field is not far from where its fellow London-listed explorer, Melrose Resources, has had a big success. In addition, it has interests in fields in Georgia, Russia, Italy and Turkey.

JKX is also looking to acquire assets and has its eye on a number of opportunities in the former Soviet Union and Eastern Europe where it has a good track record of delivering value. But, with JKX shares trading at a premium to peers, and worries about its reserves as yet unresolved, investors would do well to look elsewhere in the sector.

ArmorGroup

Our view: Hold

Share price: 87p (-3p)

ArmorGroup, the security and defence services group, suffered a 21 per cent slump in pre-tax profits last year. To blame was the expiry of a contract where Armor was paid to provide training for bodyguards to judges in Iraq.

Nevertheless, business is still booming for the company in the troubled Middle Eastern state. As it continues it's decent into civil war the services of security firms like Armor are in big demand. The company is doing particularly well from providing security to convoys travelling through Iraq. It shields 30 per cent of all convoy movement in the country.

Given the tragic situation of Iraq, it should remain a money spinner for Armor for years to come. The group has recently reduced its reliance on the country for profit and is also doing well from troubled regions of Afghanistan and Nigeria.

As long as there is strife in the world, Armor will be in the money. Judging by human history, that is a safe bet.

ACP Capital

Our view: Buy

Share price: 127.5p (unch)

Derek Vago wants to turn ACP Capital, listed on the Alternative Investment Market, into a major merchant bank servicing small to medium- sized companies in Europe. So far he seems to have made all the right moves. Mr Vago, formerly head of Nomura's principal finance division, where he succeeded the famous Guy Hands, started the business from scratch 15 months ago. Yesterday, following a fresh fund-raising which doubled the firm's size, ACP boasted a market capitalisation of £250m. That is not bad going.

ACP makes money by managing capital for others in return for a fee and using its own balance sheet for taking positions. The space it has chosen to operate in is an interesting one and looks to be full of opportunity. Following the Basel II accounting standards accord, larger banks have increasingly moved away from servicing small to medium sized enterprises (SMEs) in Europe and focused on larger companies. This has left a space for ACP to fill.

It aims to provide a range of financing solutions to SME's from equity to various types of borrowing. So, for example, if you are a chemicals company in Germany and want to buy your rival across the road ACP will help you finance the deal. It can use both the money it manages for others and its own balance sheet for this and can also call upon fellow financiers in this field should it want to spread the risk.

In its first year of operation, ACP made a profit of £15m on sales of £19m. Key to its future success is growing its funds under management and getting more and more deal flow - that is clients like the German chemicals group wanting to acquire a rival. To this end, it will invest part of the £150m it raised from yesterday's placing on securing alliances with investment boutiques and small banks in France, Italy, Germany and the UK in the hope they can bring it a constant flow of clients.

The speed with which ACP has grown is certainly very impressive. Derek Vago, its chief executive, has been the key driving force behind this. The AIM group currently trades at just 7 times forward earnings for this year. This is a substantial discount to its nearest listed rival, Intermediate Capital Group (ICG), which trades at 20 times. Although ICG has been around for a lot longer than ACP, and ICG's track record in recent years has been flawless, this discount is far too steep.

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