The Investment Column: Lookers has fire-power to focus on acquisitions

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Lookers

Our view: Buy

Share price: 177p (+1p)

The management of Lookers were right to reject the takeover offer tabled by rival car dealer Pendragon last year. Yesterday's update to the City from the group underlined this fact, if there had been any doubt.

As part of its defence, Lookers promised that it would make a pre-tax profit of at least £25m for the year to the end of December 2006. Trading has been so strong at the group that it will now be able to beat this forecast. The company's broker, Numis Securities, is expecting a profit of around £25.8m for the period, up from £18m the previous year.

Since rejecting Pendragon's all-paper offer, Lookers shares have gained ground while Pendragon stock has fallen. The net effect is that Lookers shareholders are about 55 per cent better off as a result of the group's decision to remain independent.

Lookers can now focus on acquisitions of its own and it has the fire-power to do so. Numis Securities estimates that it has the support of its bankers for deals worth up to £200m. Last month the group looked at buying European Motor Holdings (EMH), but gave up on the idea having decided that the numbers did not stack up. EMH was later snapped up by Inchcape.

However, there are plenty more fish in the sea to target. The UK motor retail industry is in great need of consolidation. There are about 6,000 franchised car dealers, with the top ten players controlling less than a third of the entire new car market.

The earnings growth Lookers has delivered means it is easily outperforming its rivals. This looks set to continue in 2007, despite last week's interest rate rise - which management believe will have little impact on its performance. Valued at 15 times forecast earnings for 2008, the shares are worth tucking away, especially as it is quite possible these estimates will once again prove conservative.

Asos

Our view: Buy

Share price: 119p (-3p)

This column tipped Asos in the autumn and the internet fashion retailer has not disappointed us. Yesterday, the group said that it had a great Christmas with sales from its website soaring by 80 per cent for the four weeks to 10 December 2006, compared with the same period in 2005.

It was not able to give figures for 11 December to 15 January 2007 due to the temporary closure of the business following the fuel depot explosion on 11 December 2005 which destroyed its warehouse. However, Asos was able to reveal that it now has 1.15 million registered users and that it had shipped 710,000 items over the Christmas period. All this leaves it well on course to deliver a pre-tax profit of £3.3m for the year to the end of March 2007, up from £1.5m last time around.

Asos targets fashion-driven 18 to 34-year-olds looking to emulate the designer looks of celebrities like Kate Moss and Paris Hilton, but at a fraction of the cost. Its sales are forecast to hit £40m for the current financial year, more than double the figure seen in 2005.

Last year the group increased the number of products it has for sale from 1,500 to 4,000. This year it plans to focus on extending the product sizes it has on offer and attracting more fashion labels to its website.

Asos operates in the fastest growing segment of the UK retail arena. Analysts estimate that the online market is growing at around 50 per cent and based on yesterday's figures the AIM listed group is outperforming the sector. This leaves Asos stock looking like an attractive prospect even if it trades at over 30 times forward earnings.

Victoria Oil & Gas

Our view: Hold

Share price: 61.5p (+5p)

This time last year, almost to the week in fact, Victoria Oil & Gas was riding high. It had just told the market that its West Medvezhye prospect in Siberia contained 5.5 trillion cubic feet of gas, 146 million barrels of gas condensate and 25 million barrels of oil. That is enough gas to satisfy the UK's gas energy needs for 18 months.

Since then investors' ardour for Victoria Oil & Gas stock has waned dramatically and as a result it has lost around 75 per cent of its value. To blame is the drop in the price of oil and gas and some disappointing drilling results from the company. Nevertheless, the estimated size of its assets underground remains impressive. According to the independent reserve auditors DeGolyer & MacNaughton the company has 5.1 trillion cubic feet of gas, 246 million barrels of gas condensate and 25 million barrels of oil at West Medvezhye.

Yesterday, there was positive news from the site in Siberia. If all goes to plan, well 103 could be producing gas for the local market by the end of the year, while the nearby well 105 will soon see test drilling start.

But, as we have pointed out in the past, Victoria Oil & Gas is a risky prospect and not just because the figures for its assets are just estimates. The biggest risk is probably its reliance on Gazprom, Russia's state energy giant, to transport the gas the group produces to market through its network of pipelines. Although Victoria and Gazprom are on good terms at the moment, should the relationship sour, the AIM listed group would be in trouble. It certainly cannot rely on getting a fair hearing in the Russian courts, which are controlled by the government.

This is a stock only for those with money they can afford to lose, if such a thing exists.

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