The Investment Column: Rudderless Shell still worth backing

Time for 'get well' card for Clinton; Hold Colefax for share buy-backs
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The Independent Online

Strictly speaking, you own Royal Dutch Shell 'B' shares, while Netherlands investors own 'A' shares. The difference is that 'A' shares attract a Dutch tax, but that will usually be reflected in the lower price of the 'A' shares. It is all a little confusing and UK investors might as well stick to the 'B' shares, but the important thing is that the company you own still has the same assets and prospects as it had at the start of the week.

The company has also created a single board, after blaming its double-headed, dual-nationality structure for the disasters of recent years. Shell had been overstating its reserves of oil, and had to fess up last year, cutting the number by one-third. But only last week the company revealed the development of its Sakhalin natural gas field in Russia was 100 per cent over budget, a whopping extra cost of $10bn (£5.8bn) that had not even been hinted when Shell sold part of the field earlier this month.

The track record stands in stark contrast to that at BP, its UK rival, but Shell shares have performed as well as BP's so far this year. Shell's new chief executive, Jeroen van der Veer, has persuaded the City he has a handle on the problems, but you wouldn't bet there aren't other unpleasant discoveries still to be made.

There is another reason for new investors to choose BP over Shell, that being the rate at which the companies are replacing the reserves they are using up. BP is replacing its assets at more than 100 per cent a year and looks set to continued to be able to do so. Shell, which replaced between 15 and 45 per cent last year depending how you measure it, hopes to get back above 100 per cent towards the end of the decade. If you wanted to be harsh, you would describe BP as a growth company and Shell as a shrinking one.

The main reason for existing shareholders to stick with Shell is the oil price, hovering about $60 while the City still appears to value Shell on the basis of a long-term price of half that. With global demand high, new sources of supply coming on stream only slowly, and refining capacity limited, it is likely the City will revise its forecasts upwards. A rising tide lifts all boats, even the rudderless ones.

Time for 'get well' card for Clinton

The latest missive from Clinton Cards is not something you would be pleased to receive in the post. It was a profits warning, blaming tough high street trading.

In truth, there is more to this warning than just the tough retail environment. The £46m acquisition of the Birthdays card shops chain by Clinton last November is proving a disaster. Sales there were down 1.7 per cent in the past 24 weeks, costs appear to be higher than expected and the introduction of new product ranges is taking too long.

We last wrote on Clinton before the acquisition, when we told new investors to steer clear. Even then there were warning signs in the main chain, most notably rising numbers of unsold cards. Like-for-like sales in the main Clinton chain are running 1.9 per cent down on last year.

As the broker Seymour Pierce put it yesterday, "there must now be a fairly large management credibility issue and we expect Clinton shares to trade at a hefty discount to its small cap retail peer group."

What will restore the market's faith in what until now has been a well-run, gently expanding company? A store review being conducted as part of the Birthdays integration, which will see a further 40 disposals over the next few months, might have to be stepped up.

The City is unlikely to give the benefit of any doubt until after the all-important Christmas trading period, but the risk is that competition from the supermarkets will add to Clinton's woes. Sell.

Hold Colefax for share buy-backs

Country house chic is the height of urban sophistication when it comes to home decorating, but you'd not know it from Colefax's glum prognosis for its UK arm.

In its interim results yesterday it fretted that the slump in multimillion-pound home sales will hit demand for its luxurious, flower-patterned wallpaper and fabrics.

Luckily for investors, it relies on the UK for only a fifth of its sales from its core fabric division. The group's most important market by far is the US, which put in the one stellar performance last year. US sales rose 12 per cent, as the Yanks lapped up the quintessentially English style of the company's brands, which include Colefax & Fowler, Jane Churchill and Larsen.

A new showroom in Washington DC is further fuelling demand.

The shares, up 10p to 109.5p, are tightly held. That would make it easy for David Green, the chairman and 25 per cent shareholder, to follow the example that was set by his one former quoted rival, Osborne & Little, and take the group private. For that reason, and the prospect of further earnings-boosting share buy-backs, there is no need for investors to redecorate their portfolios. Hold.

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