The Investment column: Kazakhmys is a quality stock worth digging into

Paddy Power; Playtech
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The Independent Online

Our view: Buy

Current price: 1,333p (+34p)

Anyone looking at the mining sector could be forgiven for thinking the circus has already pulled out of town – after four years of rising metal prices, matched by rising equity valuations, how much value can be left in the sector? Well, plenty if yesterday's interim results from the copper producer Kazakhmys are any indicator.

The results were well ahead of forecasts, with pre-tax earnings rising by 22.2 per cent to $1.32bn (£655m), on revenue also 22 per cent better at $2.8bn. The company remains one of the lowest cost producers and, as a result, cash generation was equally impressive.

However, good though the results were, investors will be equally delighted by other events. The company has announced a $400m buyback programme and a special dividend worth a total of $235m, equal to $0.50 per share. On top of that, the company has also confirmed that it will exercise an option to acquire part of ENRC, a privately-held Kazakh mining group with alumina, iron ore and ferroalloy assets. The deal, valued at $810m, widens Kazakhmys' asset base and although at the moment there are no plans for a full bid the investment should further strengthen an already formidable balance sheet.

Since the start of the market correction, shares in Kazakhmys have fallen almost 30 per cent. Clearly, these results show that the fall is not justified and as a result the stock is approaching bargain-basement value – it trades on less than 8 times forecast 2008 earnings.

Most of the demand is coming from China and South-east Asia, but even if growth in those economies slows it is unlikely that demand will shrink to the point at which Kazakhmys becomes unattractive. A full acquisition of ENRC would be a major fillip, but even with just the current investment Kazakhmys' prospects are greatly enhanced.

The bull market in metals may slow down, but low-cost mass producers of quality metals like Kazakhmys should prove to be an excellent long-term addition to any portfolio. The circus should be in town for a while so investors who have ignored miners so far should bite the bullet and buy.

Paddy Power

Our view: Buy

Current price: €24.35 (+€1.35)

When bookies get stuffed by punters, it is usually a good time to buy the shares because investors tend to forget that this happens from time to time and mark down the price. Recently, however, the results have been very much in Paddy Power's favour and Irish eyes are smiling, at least at its HQ.

Nonetheless, there is more to the Power story than a run of bookie-friendly results. The decision to buy Turf TV – which provides pictures from 30 UK courses (including the big guns) and has been snubbed by the major British bookies – offers an important marketing advantage that should see the punters pouring into Powers shops. This showed in the results, with the UK retail operation now in profit.

Plans to double the number of outlets in the UK in three years are to be welcomed, as is the decision to look beyond London, helped by the recent liberalisation of gambling laws. The online operation is expanding quickly and the addition of a financial spread-betting arm with the help of a partner is an interesting move.

But despite the growth it is showing, Power has still found room to return cash to shareholders (so it should, with operating profits doubling). The shares' rating of 18 times next year's earnings is pretty demanding, but the company has proved itself able to live up to a lofty valuation in the past.

The last time we looked at Paddy Power, it was close to an all-time high and we said hold. There is enough evidence from yesterday's statement to suggest there really is more to come. Buy.

Playtech

Our view: Buy

Current price: 358.5p (+1p)

The fallout from the US anti-gambling legislation was always likely to hit some harder than others, and so it has proved. Playtech, a provider of online gambling software, always looked well equipped to survive almost unscathed, and so it has.

That said, Playtech has not been immune to the US situation. Pre-tax profit for the first half fell from $30.7m to $29.4m as the impact of licence withdrawals from the US and recruitment costs hit the bottom and top lines – revenue was also marginally lower at $44m. That said, the company was never hugely reliant on the US market and its concentration on European and Far East customers has clearly paid off.

The Israel-based group provides software platforms for all forms of internet gambling, from poker – where its software is used by a significant number of the largest online gaming groups including Party Poker – to sports books and other electronic gambling operators.

Looking forward, the company hinted that it expects to generate new licensees in Europe and Asia as well as to develop new revenue streams through new software developments from within its customer base. Even if the US maintains the current prohibition on gambling, there is enough scope from within its current operations for Playtech to deliver on what, given its growth, appear to be modest targets.

Playtech does not have much in the way of competition and the online gambling industry, outside of the US, still has excellent growth prospects – and providing the nuts and bolts to make it happen is a good place to be. The shares trade on just over 17 times forecast 2008 earnings, and for investors with a healthy appetite for risk this looks well worth a punt with far better odds of making a few quid than on the average poker game.

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