The Investment Column: Persimmon building from a strong position

Agcert; Falkland Oil & Gas
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The Independent Online

Our view: Hold

Share price: 150.1p (-7p)

It's tough to see the bad points in Persimmon Homes' trading statement yesterday. It's a good time to be a builder, what with a pronounced shortage of homes in Britain, a buoyant market, a good economy and lots of takeover activity. Persimmon, though, is performing well.

The market is a competitive one but Persimmon has still managed to grow sales revenue by 38 per cent. Legal completions should be up 32 per cent to 16,700 and the company will be able to show another set of record results when it reports next year.

If that is the past, the future looks rosy as well. Forward sales into 2007 will be over £700m against £572m in 2006 and the company says it is still managing to get its hands on land at attractive prices with a total land bank of 78,000 plots.

The Government's aim of liberalising the planning laws to make it easier for homebuilders like Persimmon can only benefit the company, which also managed to accelerate synergy savings beyond the £40m a year promised from the acquisition of rival Westbury.

Of course, managers always tend to underestimate synergies when they do deals, so they can look good by outperforming. But it is still welcome news.

What's more, Persimmon is not going to risk overpaying for Wilson Bowden, currently the subject of several takeover approaches.

Are there any blots on this green and pleasant landscape? Well, the shares are not exactly cheap, trading at 11 times this year's forecast earnings and yielding less than 2.5 per cent. They also sit near an all time high. This stock is no undiscovered gem, its attractions are known to all. Still, analysts note that it holds one of the best landbanks in the sector and produces some of the highest returns from the land that it has. So hang on to the shares, because while the company's success is factored into the price, they should be solid, if unspectacular performers, over the coming year. Hold.


Our view: Buy

Share price: 157.5p (+10.5p)

Who would have guessed there was serious money in horse manure? It turns out, however, that if you're a carbon emissions trader, such as Agcert, animal excrement is the new gold dust.

Agcert makes its money by capturing the carbon emissions from animal waste at a number of farms across South America and Canada. Its machines then either destroy the methane, or use it to generate energy. In return for such environmentally-sound practice, the company is granted carbon emission credits, which it can then sell onto companies who produce too much carbon and who are in danger of exceeding the targets set for them by their government.

The industry is a relatively new one. However, with the implementation of the Kyoto agreement, companies now risk being fined if they do not reduce their emissions below government limits. Although some companies are able to reduce their emissions by making step-changes to their business, others are on a more gradual road to reform, and find it is more cost-effective to buy carbon credits in the meantime.

There is no doubt over the long-term that this is a boom business. But in the short-term there remain several risks - the greatest of which is Agcert's reliance on constantly changing regulatory environments.

Yesterday's trading statement showed that the management is doing as well as it could. Production targets are being met, the company's fixed contracts have been renegotiated at better prices, and new bank facilities have nearly been secured. But the short-term risk of a regulatory hick-up remain.

Nevertheless, we believe the long-term story is too compelling to ignore. Prepare yourself for a potentially bumpy ride, but buy.

Falkland Oil & Gas

Our view: Buy

Share price: 87.5p (+4p)

Investing in Falkland Oil & Gas is a little like putting your money on a strong outsider in the Grand National. If it comes home - and strikes oil - shareholders are likely to see their money multiplied many times over. If it doesn't, you're unlikely to see a penny of your investment back.

The company was floated on the Alternative Investment Market two years ago, and now has more than 100 prospects in the south Atlantic Ocean. Chief executive Tim Bushell has acknowledged that if just one of these comes off, it could transform the company. If several sites work out, the company's shares will go through the roof.

Unfortunately, it's a long-term game. With all the dozens of sites to survey, the company is not expected to start drilling its first exploratory well until 2008. Publishing its interim results yesterday, the company could do nothing but reassure investors in its conviction that it would find oil, and point out that it is still attracting interest from new institutional investors.

If you've got a big enough portfolio, then these are exciting shares to hold. But only buy them with money you can afford to lose.