The Investment Column: Seven good years and the potential for more make Paladin a good buy

Restaurant Group has done well but its price makes it too expensive; Buoyant buy-to-let scene makes Paragon a healthy prospect
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The Independent Online

Some oil and gas explorers offer exposure to exotic parts of the world and loads of risk - with huge potential upside. Paladin Resources takes a different approach. It has 70 per cent of its production coming from the long-established North Sea - from the UK, Norwegian and Danish parts of it. That makes it safe, if rather less exciting than the likes of its rival Burren Energy.

However Paladin does have its tentacles in less established parts of the world, such as Tunisia, which provide more in the way of unknown potential.

These days, with oil at sky-high prices, any company that has sizeable production, as well exploration, is going to do well. This year production is going to come in at some 47,500 barrels per day, which should grow to 60,000 bpd by the end of next year. That is because a number of further interests will be brought into production.

To a certain extent, any company pumping out oil these days just has to sit back and count the money. The price of crude remains close to $70 (£38.60) a barrel and it would not be a great surprise if it ended the year even higher than that. Paladin's chief executive Roy Franklin, however, still uses an oil price assumption of $22.50 when assessing projects.

There is much talk of "super-cycles" or "super-spikes" which argue that oil will remain at these historically record levels for years to come. Mr Franklin does not buy that. It is a cycle like any other.

"I think the question is whether we are top of the cycle yet or do we have another two or three years of high prices before it turns down," he says.

For the first half of the year, Paladin's revenue was up 23 per cent to £117.4m, while pre-tax profits more than doubled to £101.6m.

Paladin says it has offered seven years of steady growth to investors, with the shares responding accordingly - its stock has raced up more recently like others on the back of the oil price boom. At 313.5p, it's a buy.

Restaurant Group has done well but its price makes it too expensive

The Restaurant Group (TRG), owner of chains such as Frankie & Benny's and Garfunkel's, has been attracting hordes of customers scared away from Britain's city centres by binge-drinking hoodies to its out-of-town retail and leisure-park venues.

Announcing a 20 per cent increase in interim profits to £12m, the company plans to open 90 Frankie & Benny'srestaurants over the next five years, to take its total to 200. Operating profits in this unit rose 32 per cent.

Concession outlets in airports and train stations have been another success. TRG has also bought Blubeckers, a chain of gastropubs. Popular with affluent over-50s, it is in the right demographic for growth.

Still, the high street restaurants - Caffé Uno and Garfunkel's face tough times. Garfunkel's gets about two-thirds of its business from Central London, where trade slowed after the bombings this summer. And Caffé Uno's bland style is an easy formula for competitors to better.

There is little sign of recovery here and fears that this division would be a drag on the group informed our view in January that shareholders should take profits when the shares were 124p. Now at 130p, its valuation still looks full. Hold.

Buoyant buy-to-let scene makes Paragon a healthy prospect

Paragon, the buy-to-let mortgage lender, has consistently defied the doom-mongers who thought the business would be hit hard by the slowdown in the housing market.

Paragon says its focus on lending to professional property investors with a good track record has served it well and makes it less risky than other buy-to-let players. It has also confidently predicted that landlords would benefit from slowing house prices as rents rose.

Yesterday's upbeat trading statement from the Paragon group provided further evidence that its approach is paying off. The company expects loan advances in the second half of the year to be well ahead of the first half and last year's second half.

This implies at least 38 per cent loan growth from the £637m achieved in the first half. While the bad debt charge will be higher than last year in absolute terms, it remains stable relative to the size of the group's loan book.

Paragon is well placed for the future. Changes to pension rules due to take effect next spring will allow investors to buy property as part of their pension plan. That should give a boost to specialist lenders such as Paragon.

The company also hopes to benefit from the recent cut in interest rates, with the prospect of more to come, as rental yields will rise and seasoned landlords are likely to take advantage of market weakness to continue building their portfolios.

The promise of a "significant increase" in the dividend spells good news for shareholders, as does the ongoing £20m share buy-back programme.

The shares have risen recently from their previous lowly rating, partly on rumours that the group is being stalked by a series of larger players.

The stock is now trading at just over 10 times forecast earnings for the current year, in line with the mainstream banks. At 485.5p, it's a hold.

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