Stay shy of South African brew

International Power; Paladin Resources
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The Independent Online

Risk Averse investors, like this column, have tended to shy away from South African Breweries. The world's fifth biggest brewer may belong to London's FTSE 100 but, for now, that is its only link with this country.

SAB relies on its home market, where it has a monopoly, for 65 per cent of its earnings and on Africa for a further chunk. But in the past 18 months beer in South Africa, where it has 98 per cent market share, has fallen out of favour. Although SAB yesterday said the trend was improving, the nation's beer volumes were still down one per cent in the five months to end-August. Last year, they slipped 5 per cent.

The brewer, whose flagship lager brand is Castle, has turned its African experience into a virtue of late, chasing growth in China, India and eastern Europe. It cites growth rates of 6 to 7 per cent as the main attraction, plus synergy benefits. Brazil – the world's fourth-largest beer market – is looming on SAB's radar screen. The downside of such markets is their risk profile, which augments SAB's already high exposure to foreign exchange fluctuations. SAB reports in US dollars and suffers when the rand is soft. It argued its pre-tax profits for the year to March of $646m (£455.5m), down 7 per cent, would have been up 15 per cent in rand.

Some say the solution lies in a major acquisition in a stable currency beer market – such as the UK. Yesterday's long-awaited ruling on the Interbrew saga – that the Belgians could sell either the whole of Bass Brewers or the Carling brand – gives SAB a chance to pick up Bass, if the price were right. It has upwards of £1bn in its war chest and could find more if it chose to extol the merits of combining emerging with mature markets. Its shares, down 8p to 476p, have had a bumpy ride and will continue to bounce around while SAB decides whether to bid for Bass. On a forward price-earnings ratio of 12, the rating is modest but amounts to an unjustified premium to Scottish & Newcastle, the other big UK-listed brewer.

International Power

Separated from Innogy last year, International Power is offering high-growth and geographical spread. Unlike a traditional utility, it provides no dividend and offers a high-return, high-risk strategy, building power stations and supplying to largely unregulated markets.

However, when its interests include those in the US and Pakistan, investors might be forgiven for being wary in these uncertain times. Even without disruptions in these markets, energy consumption is tied to economic growth, which is looking shaky. Aside from the unfolding geo-political situation, yesterday's interim results also threw up doubts over future growth levels. The company revealed that it was selling electricity at well below cost and also said that pricing in Britain was "unattractive".

The half-year figures, which showed pre-tax profit up 39 per cent to £152m, were healthy enough. However, the company's shares closed down 13 per cent at 217p. Although it has no exposure to California, which has been hit by an electricity crisis, investors yesterday moved to close the gap with its US peers, some of whom have halved in value in recent months. Dresdner Kleinworth Wasserstein, the broker, is forecasting 13p-a-share of earnings this year, leaving the stock on a forward multiple of 17. Avoid.

Paladin Resources

The uncertainty now plaguing many market sectors is an everyday fact of life for oil and gas exploration companies. Unlike integrated giants such as BP or Shell, exploration plays are driven by entrepreneurs, making them more inherently risky, but potentially more rewarding. First-half results from Paladin Resources, a small-cap explorer valued at £114m, produced after-tax profit of £10.4m, ahead of expectations and up three-fold from year ago levels. Much of the gain came from the $42m (£29m) acquisition of Petro-Canada's oil and gas interests in Norway, while further production gains are due from the buyout of Enterprise Oil's Danish North Sea interests.

Roy Franklin, the chief executive, and most of the management team, built the former Clyde Petroleum before selling out to Gulf Canada for £500m. Looking to build a similar sized entity with Paladin, they have been refocusing its portfolio on stakes in North Sea producers and away from the US.

Average daily production this year is expected to be about 17,500 bpd. The target for next year is 20,000 bpd, rising to 35,000 bpd by 2004. Mr Franklin has budgeted on oil remaining over $20 medium-term but says it can remain profitable in the unlikely event of a return to $15 a barrel.

On a full-year estimate of £25m post-tax, Paladin trades on a p/e of just 4.6. Though debt may climb above the current £71m to fund further expansion, the company's ability to generate cash makes the shares, up 1.5p at 53.5p, look appealing.

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