The Investment Column: Canadian deal puts Xstrata into 'buy' territory

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The Independent Online

Our view: Buy

Share price: 2,220p (-33p)

The mining company Xstrata was finally given the go-ahead from shareholders for the £8bn acquisition of the remaining stake in its Canadian rival, Falconbridge, yesterday.

The deal gives Xstrata yet more scale, as well as diversification into the nickel market. Furthermore, while the management has yet to be drawn on the extent of the synergies from the take-over, analysts are forecasting the deal could increase earnings by as much as 25 per cent by next year.

At a time when commodity price growth has cooled, the deal provides the perfect next step for a company which has delivered its shareholders phenomenal returns over the past few years.

Having more than quadrupled in size over the past four years, it remains one of the best long-term performing stocks in the FTSE 100. But is such growth sustainable?

Commodities have been booming, with prices hitting record highs almost every month, driven by soaring demand from emerging economies at a time when global stockpiles of metals are at all-time lows.

Success has bred success. As cash flow has rapidly increased, companies such as Xstrata have had more to plough back into developing new mines - and to make acquisitions such as Falconbridge. But prices cannot keep going up. Most analysts are factoring in price falls for many commodities over the coming year, and the share prices of companies such as Xstrata are inextricably linked to these movements. Furthermore, costs for mining companies have been rocketing almost as fast as prices. Labour, fuel and transport costs have all risen sharply, and have shown no sign of abating.

Nevertheless, compared to the largest mining stocks in the UK, Xstrata does not look overpriced. It is trading on less than 10 times this year's forecast earnings, and even after accounting for potential falls in commodity prices and cost inflation, several analysts believe there could be as much as 30 per cent upside to its current share price. Investors should tread carefully, but for those with an appetite for risk, Xstrata still looks worth a punt. Buy.


Our view: Buy

Share price: 1,264p (+15p)

Property companies are as fashionable these days as the postcode of Hammerson's new headquarters in Mayfair in London.

At the last Budget, Gordon Brown sparked a rerating of a traditionally fusty sector by clearing the path for property firms to convert into tax-efficient real estate investment trusts (Reits).

Shares in Hammerson, the country's fourth-biggest property group, have jumped 45 per cent in the past 12 months, outperforming the FTSE All-Share index by 32 per cent in the process. They are now trading at 9 per cent discount to net asset value (of about £6bn), against an average discount across the sector of 7 per cent. Hammerson appears an attractive pick in a hot sector.

Prospects for growth look good. Concerns over Hammerson's exposure to any loss of confidence on the high street (about 65 per cent of its portfolio is retail property, including the Brent Cross shopping centre in London) have failed to solidify as yet. Of the 24 retailers that pulled out of its premises at the end of last year, 21 have been replaced (arguably, with better-quality clients).

Rents on retail properties have risen by 4 per cent this year, while lease incentives on business premises have shortened.

Hammerson enjoys a reputation for being one of the most adept developers on the block, with an emphasis on ploughing back sale receipts to do up its properties before selling them at a premium. Yesterday, the company unveiled the £37.5m sale of Cardiff's Avenue Retail Park to Lanebridge, a property fund.

Capital recycling does, however, take the shine off Hammerson's yield. At 1.6 per cent, which is set to more than double as a Reit, it remains well shy of the sector average.

Mean dividend aside, this is a well-run company with good growth prospects. Buy.

Seeing Machines

Our view: Buy

Share price: 2.75p (+0.13p)

Seeing Machines may not be large enough to catch the eye of many investors, but is well worth a look.

Shares in the AIM-listed imaging software developer leapt nearly 10 per cent yesterday after it secured funding from the Australian government to continue development of its glaucoma diagnostic device.

The A$2.1m (£840,000) grant hands Seeing Machines a golden opportunity to set the standard for non-contact glaucoma detection in a market estimated to be worth up to £300m a year.

The vision-impairing disease affects some 14 million people globally, but current detection techniques provide inconsistent results.

There is more to Seeing Machines than meets the eye. Its technology enables computers to detect, track and interpret human faces as well as moving objects, and has significant potential in markets as diverse as sports, robotics, security, and the automotive and transport sectors.

Fatigue causes between 15 to 30 per cent of transport accidents and the software is being used to develop next-generation safety products.

Seeing Machines' software can be used to monitor driver fatigue and distraction. For example, it could warn of obstacles in the road if it detects that the driver has not looked at the relevant road sign.

Seeing Machines operates out of the Australian National University, which holds an 11 per cent stake, while the co-founder Volvo has retained a 9 per cent stake. Its shares have declined from a high of 4.8p earlier this year.

Analysts expect the company to turn profitable in 2007 after revenue increased 14 per cent in the first half. With A$3.1m in the bank before yesterday's grant, its future looks secure. Buy.