Take best out of BHP Billiton while you can

Pendragon; Amstrad
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The Independent Online

Sceptics doubted the value of the merger of BHP and Billiton last year, but the combined mining giant has defied weak commodity prices to deliver a decent set of interim results.

Brian Gilbertson, the chief executive-designate, puts the performance down to the spread of products the company now boasts. While petroleum and copper, for instance, saw reduced earnings during the six months to 31 December, there were improved results from coal and iron ore.

On its own Billiton would have been looking to cut back expenditure at this stage in the cycle, saddled with its high debts, while BHP would have lacked the range of projects in development. Together, the idea is that the combined companies will provide steadier earnings through the cycle and with its diversification, it should not be a bet on any particular commodity. At the same time, BHP Billiton argues that it offers more exciting growth prospects than, say, a utility.

Headline profit was up 3.5 per cent to $1.198bn (£837m), although that was helped by lower interest payments and foreign exchange gains. Earnings before interest and tax were 11.7 per cent lower.

While the results appear to support the investment case for the Anglo-Australian company, its recent stock market reception has been far too enthusiastic. Since late September, the shares have motored as investors bought in anticipation of an economic recovery and, post-Enron, mining stocks have benefited from offering a straightforward, easy-to-understand investment: you simply dig it out of the ground and flog it. BHP Billiton has minimal off-balance sheet debt.

There was no evidence yesterday of a recovery in BHP Billiton's markets. The outlook for commodity prices is not encouraging and, if the second half of the year does not offer foreign exchange gains, those results could look quite poor.

The recent share price rally came too far ahead of any general world economic rebound. BNP Paribas, the broker, has the stock on a forward multiple of 20 and it trades at a 17 per cent premium to Rio Tinto and Anglo-American. Take profits.

Pendragon

Pendragon has restored its va-va-voom. This time last year Britain's largest car dealer said profits had collapsed as consumers stopped buying new cars. They blamed the Government's Rip Off Britain campaign against the car makers.

Yesterday the message was different. Pendragon's profit before exceptionals more than doubled to £26m in the year to 31 December, exceeding market expectations and sending its shares up 15 per cent to 289.5p. Partly, this is due to improving market conditions. Better new car deals and lower interest rates tempted motorists back to showrooms. Pendragon said sales of new cars reached an all-time high and turnover of used cars also improved.

But the company can itself claim credit for a good part of the renewed profitability. It moved upmarket two years ago and, as the largest UK dealer in Jaguars, BMWs and Porsches for the past 12 months, boosted its profit margin by a third. Pendragon has also shed 44 loss-making dealerships and will continue to slim down its massive property portfolio. It will return cash to shareholders through a share buy-back.

The big issue of this year will be the European Union's proposals to amend the terms of car manufacturers' exemption from European competition law. The 14-year exemption has enabled manufacturers to change their dealership arrangements with very little notice. This has made it difficult for dealers to plan long-term strategy and has depressed the sector's stock market rating. The new proposals, set to come into force later this year, would force manufacturers to give good reasons if they want to terminate relationships.

Even after yesterday's dramatic rise in its share price, Pendragon has an undemanding price-earnings ratio of 8 and remains at a slight discount to its smaller rivals. Buy.

Amstrad

Sir Alan Sugar's Amstrad has not proved a sweet investment since the bursting of the tech bubble. As well as having lost 94 per cent of its value, the company is also losing sales and profits. Figures for the half-year to December, out yesterday, showed turnover slid to £19.6m from £44.1m, while profits were £923,000, off 39 per cent.

Sales of its digital TV set-top boxes have slipped inexorably for two years. So all the hopes for decent future growth are pinned on the e-m@iler. Last year, it launched a first-generation model for sending e-mails and text messages from a desktop machine, and a new, internet-enabled model went on sale last week. Amstrad is splashing £2.2m on advertising and initially selling them below cost. It hopes to get a steady income from taking a cut of the phone bill for using the e-m@iler.

While all the eggs are in this dangerous basket, Amstrad shares remain unattractive, though the company does have a £28m cash pile that could be used for an acquisition to bolster growth. That's not worth betting on, and investors would be wiser to focus on the expectation that the group will plunge to a £2m loss this year. The shares are too high risk for all but true believers in the e-m@iler's mass market appeal.

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