The Investment Column: The sliding dollar and rising oil prices are taking their toll on Cadbury Schweppes

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The Independent Online

Our view: Short-term sell

Share price: 527p (-10p)

The headwinds facing Cadbury Schweppes seem to be growing in strength and could make the remainder of the year a difficult one for the confectionery group. Merrill Lynch perfectly summed up the near-term risks facing Cadbury in a note to clients before the group's annual shareholder meeting today.

The biggest is the company's exposure to the fast-falling US dollar. Merrill calculates that Cadbury's three US divisions account for 53 per cent of total group earnings. Making matters worse is the fact that these US businesses have higher margins that the rest of Cadbury's operations.

Second, the confectionery group finds itself suffering at the hands of rising oil and energy costs. This was a problem in 2005 and the continued rise in the crude price since then does not bode well. Cadbury's management has suggested that every $10 (£5) increase in oil knocks about £10m off total group earnings. Other input cost rises, such as sugar, which is up 45 per cent in the year to date, adds to its troubles.

Third, and probably least important, is the lack of a meaningful flu season in the US this winter. This is likely to have caused a sharp drop in sales of Halls cough sweets, which is a high-margin product.

Given these factors, Merrill Lynch downgraded its forecast for Cadbury 2006 earnings yesterday by 5 per cent. It believes that the shares are overvalued relative to the peers Danone and Nestlé because of its slower growth prospects.

Bid talk has frequently surrounded the company over the past six months. Hershey's and Kraft are most often touted as possible predators for the group, but the takeover rumours look overblown. Although the stock has dropped 10 per cent since the middle of March, it probably has further to fall in the near term.

Urals Energy

Our view: Hold

Share price: 447.5p (-7.5p)

The slew of bullish news from Urals Energy continues. Yesterday, investors were busy poring over the Russian oil group's plans to raise $180m by way of an equity issue to fund the acquisition of a significant oil and gas field in eastern Siberia.

Called Dulisminskoye, the project produces 1,000 barrels of oil a day. Urals expect this to rise to 30,000 barrels by 2008.

If all goes to plan, the purchase of Dulisminskoye should prove an inspired deal. However, there are risks. The commercial success of the field depends on the construction of a pipeline from the region into China. The first phase of the construction should be complete by the end of 2008 but any meaningful delay could substantially undermine the economics of Dulisminskoye. Without the pipeline, Urals Energy faces significantly higher transport as it would be forced to rely on an expensive rail route into China.

For now there is no reason to doubt the judgement of the group's management which includes Leonid Dyachenko, the former son-in-law of Boris Yeltsin, the former Russian leader. Along with the news of the fundraising came a substantial upgrade of the group's production targets. When Urals floated in August, it promised to produce 10,500 barrels of oil a day by the end of 2007. The company has already hit this target and it now expects to boast output of 19,000 barrels by the end of next year.

Analysts forecast more acquisitions from the company in the future. With a man such as Mr Dyachenko on its board, Urals should be able to secure more choice deals. He was part of the Yeltsin family's inner circle during the 1990s. This was when the Russian leader privatised large parts of the former Soviet Union's economy, presiding over one of the world's biggest transfers of wealth from public into private hands. Mr Dyachenko's connections in Russia are likely to be second to none.

Urals Energy's value has nearly doubled since its AIM float last summer, so the best gains have probably already been had. Nevertheless, the stock is worth holding on to.


Our view: Buy

Share price: 720p (unch)

Holidaybreak is a specialist packaged holiday provider that sells everything from short breaks in fancy hotels to family camping holidays across Europe. In 2005 it sold 3 million holidays in more than 100 countries. Yesterday's interim results revealed that losses have been reduced by 12 per cent with net debt slashed to £36.2m. The first-half dividend was raised by more than 10 per cent.

Holidaybreak is attempting to sell its camping division to focus on hotel breaks and lucrative adventure holidays. The division's outlook has improved and the unit experienced reduced losses. The improved performance has raised hopes that it will soon be sold.

If Holidaybreak can execute the disposal promptly, shareholders should be very happy campers. The company is expected to use the proceeds to return cash to investors through a buyback of shares or for acquisitions. Additionally, the disposal might open the way for a bid for the rest of the group. Given its strong cash generation, the company is undervalued. Buy.