Get some in at Punch Taverns
Hold on to copper-bottomed Antofagasta; Cut losses and jump out of Tadpole Technology
Thursday 30 January 2003
Time at the bar? The stock market seems to think it's chucking out time for the pubs sector, and share prices have been given a pummelling in the past couple of months. In the case of centrally-managed outlets located on crowded high streets, the roughing up is probably justified and it does seem that people are heading to the boozer less often at the moment. But the market seems to have lost sight that this sector can be a haven in troubled economic times, and certain stocks are looking attractive
Punch Taverns, Britain's second-biggest pubs operator with 4,479 outlets, is one such bargain. Unlike groups which manage their pubs direct from head office, Punch receives a set rental income from its publicans. This makes it less exposed to the effects of any drop in sales than some of its rivals, although beer sales still account for 63 per cent of turnover and the investment is not without its risks.
Giles Thorley, Punch's chief executive, used yesterday's shareholder meeting to trumpet the strength of locals versus high street bars, pointing to the 2 per cent rise in like-for-like sales in the 20 weeks to 4 January. This was slower growth than the 3 per cent rise it reported last year, but unlike many of its trendier, town centre rivals, Punch expects to hit its profit targets.
Those still sceptical of Punch – it only listed last May and is still just five years old – highlight its relatively high rents, which could see it come unstuck if its tenants start to struggle. Its estate (cobbled together from the cast-offs of groups such as Allied Domecq and Whitbread) isn't the smartest, either.
Since we tipped Punch at the flotation in May, the risks have increased, but the shares now trade on a forward price-earnings ratio of just six. Unless you think beer is going out of fashion, that's too cheap.
Hold on to copper-bottomed Antofagasta
Antofagasta is one of the UK's oldest quoted companies, with a continuous stock market listing since 1888 when it was founded as the Antofagasta (Chili) and Bolivia Railway Company. And, at a market value of £1.2bn, it is possibly one of the biggest UK companies you haven't heard of.
The Chilean railroad business is still there, bringing products from the mines in the interior out to the coast for export. But now Antofagasta is one of those doing the mining. It owns Los Pelambres, the sixth-biggest copper mine in the world. A production report yesterday suggests that Los Pelambres is turning out to be very rich indeed. The amount of copper in the ground was underestimated by initial geological surveys, and output in the fourth quarter of 2002 outstripped expectations.
In total, from Los Pelambres and two other projects, Antofagasta mined 137,100 tonnes of copper in the quarter, taking the annual total to 460,700, a 3.5 per cent increase on the previous year. John Meyer at Numis forecasts that net profit in 2002 will amount to $97m (£60m), up 56 per cent on the year before thanks to the third mine coming fully on stream. The railway business is also chugging along nicely, throwing off cash to pay a dividend worth 5 per cent of the share price.
Improved copper prices should feed through to earnings this year, going some way to justifying a price-earnings multiple of 19 times. But that copper price has been driven by speculation rather than a pick-up in global demand and may yet be reversed. On balance, and with a big family shareholder that may yet decide to sell out to one of the world's mining giants, the shares (down 1p to 602.5p) are a "hold" rather than a "buy".
Cut losses and jump out of Tadpole Technology
There is something beguiling about the name Tadpole Technology, suggesting it might be about to sprout legs and make a big leap in shareholder value. Its Endeavors software is an exciting way of enabling computers to share applications and to improve the security of instant messaging. But as yet it is at an early stage, with very few sales.
It is regrettable, but even the best technologies can fail to make big money if there is no powerful corporate machine to drive them towards commercialisation. Worse, Microsoft funds two of Tadpole's rivals.
There is a better established technology within Tadpole which, in an ideal world, would generate cash to support the work on Endeavors. Cartesia makes software used by utilities for relaying maps and other info to engineers in the field. Results released late on Tuesday are not detailed enough to judge how profitable this might be, but the group says Cartesia can break even by autumn. Tadpole's own broker has given up forecasting results.
What is sure is that Tadpole lost £11.1m in the year to 30 September. It reckons its £6.5m credit facility will be enough to fund the business for now, but this credit is no blessing. The debt is settled by the issue of shares, so every penny Tadpole spends on research dilutes the value of shareholders' equity. By summer, shareholders may be tapped for cash through a placing or rights issue.
Tadpole shares wriggled 11 per cent higher to 6.5p yesterday, but investors should cut their losses.
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