The Investment column: Mitchells is resilient enough to get over £140m hangover

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The Independent Online

Our view: Hold

Current price: 589.5p


Be careful what you wish for. Th pub and bar owner Mitchells & Butlers was so keen to move on a property joint venture with Robert Tchenguiz that it set up all of the hedging requirements before finding out if it could borrow the money required. As a result of the market turmoil, the hedging strategy has failed spectacularly so far, leaving M&B nursing a £140m headache – more than double its losses when the property venture was pulled in August.

To many observers' surprise, yesterday's statement included confirmation it is still looking at starting up the property vehicle. Investors could be forgiven for believing a pub and bar operator would have enough on its plate coping with the smoking ban, non-existent summer and sharp decline in beer sales – but M&B has carried on regardless.

So far, the hedging positions have not been closed out, meaning that the loss recorded is only on paper. Most of the positions taken in the hedging strategy have plenty of time value left in them even if their intrinsic value has taken a hammering, so there is a chance that by the time M&B comes to close its losses could be much smaller and could even turn into profits. But in current market that is a long shot.

Meanwhile, M&B's business is weathering the storm remarkably well and confirmed that full-year results will be at the top of market forecasts. A good thing too because M&B shares still trade at 16 times forecast 2008 earnings.

It takes a very pessimistic investor to believe the current credit crunch will last so long that the chances of M&B releasing some of the value of its massive freehold estate should be completely written off. But for now, management needs to make sure its eye is on the ball.

Burren Energy

Our view: Buy

Current price: 837p (-16p)

It may come as a surprise to hear an oil company blaming falling oil prices on a poorer than expected first half, particularly when oil has touched an all-time high as recently as last week. But that is exactly what Burren Energy did yesterday.

The mid-cap oil exploration and production group reported a five per cent fall in first half net profits to just over £66.5m as per barrel selling price fell.

Even so, the company looks in good shape as operating cash flow rose to £89.9m, up seven per cent against the same period of 2006 and rewarded investors with a 25 per cent jump in the dividend. First half production rose by seven per cent to almost 39,000 barrels of oil per day.

Burren has production operations and exploration rights in four geographic regions the Democratic Republic of the Congo (Brazzaville), Yemen, India, Turkmenistan and Egypt. Although the latter is not yet in production, the East Kanayis block in Egypt has exciting potential that could add substantially to Burren's net asset value by the time its true worth is factored in.

With its strong cash flow and profitable asset base, Burren negotiated a £250m banking facility back in July that should allow it to make the kind of transforming acquisitions that will take it up to the next level.

Investing in emerging market energy plays is always a risky business, but Burren has been able to make the quantum leap from explorer to producer without seeing its valuation get out of control.

Trading on just under nine times forecast 2008 earnings, the stock is good value and should benefit in the second half from much stronger oil prices.

Gyrus Group

Our view: Buy

Current price: 398p (-35p)

Gyrus is a rare beast, a UK medical technology group that has actually managed to deliver on its promises and given shareholders decent returns – more than trebling in value over the past five years until the summer sell-off knocked 25 per cent off its value.

The weak dollar contributed to yesterday's slightly disappointing 2 per cent growth in first-half revenue to £109.1m, although at constant currency rates the underlying growth was closer to 11 per cent. On the same basis, underlying operating profit was up 13 per cent to £17.5m while basic earnings per share rose by 40 per cent to 3.5p. However, the company's business is heavily weighted to the second half of the year.

Gyrus is a pioneer of keyhole surgery technology. Its main business is in urology, gynaecology and ear, nose and throat procedures but there is scope for the company to move into more general medical procedures. Revenues from general surgery were up by 120 per cent in the first half.

The company does almost 80 per cent of its business in the US and while the dollar may be having a translational impact at the moment, the underlying operations look to be in decent shape. Post restructuring, margins remain strong at over 16 per cent and directors clearly see yesterday's sell off as a good chance to pick the stock up at historically low levels with the shares trading on under 16 times forecast 2008 earnings, a decent price for strong potential growth.