The Investment Column: Veteran miner must dig itself out of a hole

JJB Sports; Telecom Plus
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The Independent Online

Our view: Take profits

Current price: 755p

Antofagasta has its roots in a Chile to Bolivia railroad and, other than a nominal head office, does next to none of its business in the UK. Even so, it is a key component of the FTSE 100. In fact, Antofagasta has been listed in London since 1888, making it one of the longest-serving members of the market.

Thanks to the bull market in mining stocks over the past few years its shareholders have never had it so good the company has grown almost sevenfold in the past five years, and considering that most observers, including us, remain bullish on the mining sector, it should continue to provide shareholders with decent returns.

However, nothing goes up in a straight line forever, and yesterday's poor third-quarter figures resulted in a 13 per cent decline in profits to $1.27bn. The company had already flagged up production shortfalls, so the news did not come as a surprise to the market in fact the shares rallied as at least the numbers were in line with reduced forecasts. All the same the production problems, mainly caused by lower ore grades and plant processing issues at its Los Pelambres mine, remain a concern.

Full-year copper production is now forecast to be at least 6 per cent lower than in 2006, while molybdenum production, a copper by product used by the steelmaking industry, is also going to be lower after a 14 per cent drop in third-quarter production.

In ordinary times there is enough bad news in this announcement to recommend a flat-out sell on Antofagasta. But for mining stocks, particularly those feeding the insatiable appetite of Chinese growth, these are not ordinary times.

Antofagasta is lucky its market gives it a get-out-of-jail-free card at the moment. But clearly it has production issues that must be addressed. Our advice has been the same for all the mining stocks. No one ever went bust taking a profit, so holders should think about banking some gains without heading for the exit completely.

JJB Sports

Our view: Sell

Current price: 140p

The high street is a tough old place to earn your crust; sports retailing is no different, and thanks to the efforts of England's footballers, next year looks like being as tough as ever. At least other retailers don't have to rely on a bunch of overpaid egotistical sportsmen to drum up interest in their fare.

Despite the bleak bigger picture, yesterday's management trading statement really wasn't that bad. Total revenue grew by 1.6 per cent; retail store revenue was up by 0.5 per cent, with a like-for-like increase in revenue of 1.4 per cent. Combined gross margins for the group were also up, slightly ahead of the 380 basis points we heard about in the retailer's last interim report.

This is a decent enough performance in the face of some mighty headwinds but not all of the numbers were positive. The company said that like-for-like sales grew by 1.6 per cent. At the time of its interim results in September, JJB had revealed a 5.2 per cent increase in like-for-like sales in the first eight weeks of the second half, which means that over the most recent nine-week period growth actually declined by 1.6 per cent.

JJB said it "remains cautious" about 2008. Investors should take their cue from the company remain cautious. For anyone in the stock, barring a miracle there are better places to have your money over the next 12 months and we believe that even tougher times lie ahead. Bite the bullet and sell.

Telecom Plus

Our view: Buy

Current price: 172p

Telecom Plus has belied its position as one of the smaller fish in the telecoms pond with a stellar set of results, growth that suggests its unique package of fixed-line, broadband, gas and electricity products is finding further favour with customers.

Although the customer base has stalled at 213,000 over the past six months, its existing users are sourcing more products from the company. As a result, Telecom Plus upgraded its full-year profit forecast following a 15 per cent rise in the first half, despite factoring in lower energy prices. The company tends to have a stronger second half of the year, when it derives up to 75 per cent of its revenue due to its customers using more energy to heat their houses. In effect, the company is now expected to deliver on March 2009 forecasts one year early.

This is certainly an admirable performance and not surprisingly most brokers were very bullish as a result. So are we. The company has sufficient headroom to buy back up to 12m worth of shares if it desires, and its balance sheet will remain strong even if does so. Another positive is the option held by nPower, exercisable in 2009, to buy a 29 per cent stake in Telecom Plus. The option currently values Telecom Plus at 308p a share.

Even in these uncertain times, a valuation of 10.2 times this year's projected earnings and 9.1 times fiscal 2009 forecasts looks compelling. If Telecom Plus continues its current performance, there is every chance nPower's option will be in the money when it comes time to exercise. Buy.

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