The Investment Column: Robust growth and solid prospects make Petrofac a bountiful buy

How to cash in on takeover boom; Hold on to Halstead as it weathers the gloom
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The Independent Online

One of the most in-demand flotations of the year was finalised yesterday. Petrofac, a company providing services to the oil and gas industry, had a £742m price tag when existing shareholders sold more than two-fifths of the company to the City's fund managers. That was well above the expectations set when the float was announced a couple of months back, and by the end of the first day's conditional dealings yesterday, the company was valued at £841m.

That looks steep compared with post-tax profits of about £26m last year, but this is a company enjoying solid growth - profits were up more than one-quarter in the first half of 2005 - and strong prospects.

So what exactly does Petrofac do? It designs and builds oil and gas facilities; operates, maintains or manages facilities and trains personnel; and it has a small portfolio of shareholdings in gas projects, where it co-invests with clients. These clients include most of the giant oil companies, a slew of independent exploration and production firms, and many national oil companies.

Petrofac was originally a US company, which set up UK operations in 1991 and then expanded further overseas. The US business has been sold, leaving operations concentrated in the North Sea, India and the former Soviet Union.

There are several reasons to think its stunning growth will continue, and not just because of a track record that is winning it market share. Fuel prices are sky high because oil reserves are running out or becoming tougher to tap, while refineries are overworked. There needs to be massive investment, which is the point at which Petrofac comes in. The oil majors have also started to outsource more mundane operational work, while national oil companies in the increasingly important developing world don't yet have the skills, creating more openings for Petrofac.

Ayman Asfari, the chief executive, pocketed £54m in cash from his share sale in the float, but he still has £193m tied up in the business. There is scope for a private investor able to take the long view to make a nice little turn themselves. Buy.

How to cash in on takeover boom

The £7.1bn mega-merger of Boots and Alliance Uni-Chem is the latest sensational example of what is turning into a sensational year for merger and acquisition activity. The value of deals this year has already passed the total for the whole of 2004, and we are on course for the best year since 2000.

For investors in a company on the receiving end of a bid, it is a bonanza. And for those willing to gamble in search of a short-term bonanza, Dresdner Kleinwort Wasserstein has done a great bit of analysis, screening the UK stock market for quality companies which are also likely takeover candidates.

Taking into account the sorts of financial measures that attract buyers (including cash flow and earnings stability) and ranking them according to others (including valuation as a multiple of profit and asset value), the bank has come up with a Top 30 hit parade.

Some names - such as BOC, the industrial gases group, and Hanson, the brick maker - have attracted takeover rumours - while others - including the housebuilders Persimmon and Berkeley - are more likely to acquire than be acquired. But many are new and interesting. Man Group, which has emerged as one of the world's most significant managers of hedge funds, could look tasty to a traditional fund manager wanting to diversify. It certainly looks cheap.

The metal-bashers always look good in this sort of table, IMI standing out here. And perhaps takeover attractions will put a floor under retailers such as Alexon and Topps Tiles and the nightclubs group Luminar, despite consumer-spending weakness.

Hold on to Halstead as it weathers the gloom

Few can match James Halstead's dividend record. For the 30th year in a row, the Manchester-based manufacturer of vinyl flooring has just jacked up its payout - by 11.3 per cent this year - and that on top of a 60p-per-share return of capital in January.

The company's products span flooring for commercial buildings and for residential kitchens and bathrooms, while its operations span the UK, Australasia, Germany and Scandinavia, with distributors selling its products even further afield.

It has been managing a creditable performance in the face of growing difficulties. The residential side looks vulnerable given the dip in consumer spending on expensive refurbishments. And it is suffering, like so many, the double whammy from rising oil prices, which put up energy bills and the cost of raw materials for its products.

Pre-tax profits grew 8 per cent in the year to June (excluding a one-off gain in the comparable figure for 2004). While margins look like being squeezed, the strength of Halstead's cash flows and a cash pile of £32m mean that the dividend is not vulnerable. The scope for prudent expansion of the product range and geographical reach make it a hold.

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