The Investment Column: Pilkington may be on the way back

Strong growth underpins Northgate's recent roll; Asia Energy can mine a rich seam in Bangladesh
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The Independent Online

We have been stuck in stage two of Pilkington's three-stage recovery programme for perhaps a little longer than Stuart Chambers, the chief executive, had hoped. But at least things are looking clearer for the world's second-biggest glass maker.

We have been stuck in stage two of Pilkington's three-stage recovery programme for perhaps a little longer than Stuart Chambers, the chief executive, had hoped. But at least things are looking clearer for the world's second-biggest glass maker.

The company posted a 14 per cent rise to £87m in first-half profits yesterday. But more importantly, there are signs of demand finally picking up. Construction markets in Europe are sluggish but glass prices are stabilising - though prices are not expected to rise in the next 18 months or so. The picture at Pilkington's vehicle business in North America is slightly gloomier, with sales and prices falling. Even so, operating profits there were up by £2m to £46m thanks to cost cuts.

Pilkington is moving towards the final part of a three-stage strategy that began with improving operational performance, then focused on improving the financial position, and from early next year will see the resumption of investment to grow the business. During stage one, Mr Chambers slashed costs, reducing the payroll from 39,000 in the mid-1990s to 24,000 now. In stage two he brought net debt down by one-third to £621 now, and says the aim is to get it down comfortably below £600. Pilkington is also delivering on its cash-generation target, with interim free cash flow up 9 per cent. The third stage will see plant openings in emerging markets such as Russia and China, and possibly acquisitions.

High risks remain, given the uncertain outlook for glass prices. Higher energy costs - 7 per cent of total costs - are also an issue for the glass maker, but it is trying to pass these costs on to customers. We are yet to be certain, though, that the energy surcharge, which was first introduced in North America and is now being extended to Europe, will stick.

At 94p, up 4.25p yesterday, Pilkington shares trade at about 10.5 times next year's forecast earnings. The full-year dividend of 5p, which has been paid out for the past nine years, seems secure, giving a yield of 6 per cent. Buy for recovery.

Strong growth underpins Northgate's recent roll

The £150m acquisition of Rebus by Northgate Information Solutions last December transformed the company into the UK's biggest supplier of payroll software to personnel departments and sent the company's shares into the FTSE 250, where they have attracted more investor attention that at any time since the dot.com boom.

And the acquisition is working. The integration has been successful and growth in the merged business has been such that the company was able to crow yesterday that results for the six months to 31 October will be ahead of market forecasts. Earlier contract wins might not necessarily translate into better than forecast profits for the financial year as a whole - but they probably will. It oughtn't to be long before Northgate shares break out of the trading range they have been in for a year.

The company's position in human resources is special, but it also has strong businesses supplying the police and local authorities, where the need for inter-departmental sharing of database information is prompting IT upgrades.

Growth prospects are strong and poorly reflected in a share price, 67p, representing 15 times earnings forecasts that now look conservative.

Asia Energy can mine a rich seam in Bangladesh

Asia energy has been the soaraway success of this year's flood of mining sector floats. It owns a mining project in Bangladesh which, it has turned out, has 430 millions of tonnes of good quality coal under the ground. The shares, placed at 75p when the company came to AIM in April, have shot up to 365p.

The trigger was an independent consultant's report which valued the project at an extraordinary $2.3bn (£1.2bn). There are, of course, caveats. This is still a speculative mining venture. But the massive gap between the possible value of the mine and Asia Energy's market value (£139m) means this share is worth a punt, and might even be a ten-bagger.

So, those caveats. A full feasibility study could turn up some gremlins, suggesting the coal is unusually tough to get out of the ground. The study itself is being accelerated so that production can start in 2007, but if the timetable slips the shares could be punished. And there is a big question over where Asia Energy will find the hundreds of millions needed to fund the mine and associated power station.

Asia Energy's heavyweight advisers should help a respected management steer round these obstacles. Buy.

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