Fund managers seek more solid gains
Friday 02 January 1998
Julian Fosh of Scottish Amicable was the clear winner with British Gas. The shares were boosted by the split into two as British Gas became BG and Centrica, and a record pounds 1.3bn buy-back, ending the year 62 per cent higher. A bottle of champagne to our victor.
A worthy performance also from AEA Technology, tipped by Bernard Clark of Hill Samuel Asset Management. The former division of the Atomic Energy Authority reaped the benefits of diversification. British Aerospace, the choice of Vanessa James at Legal & General, had a good year, borne aloft by its strong order book and improving fortunes at Airbus. Sainsbury's fulfilled the promise of Tom Crombie at Scottish Equitable.
At the other end of the scale, the sickly performance of the biotech sector knocked a hole in Skyepharma, Justin Seager's tip at Dresdner Kleinwort Benson.
This year's recommendations come from most of the same fund managers as last year plus a welcome debut by M&G.
Tom Crombie, Scottish Equitable. Tip: Wolseley 483p
It is tempting to choose a financial stock for the best performance in '98 because there will undoubtedly be more rationalisation within the sector. However, picking a single stock in the hope of takeover is a mug's game. My stock is therefore Wolseley, is a well-managed distribution business with big shares in the plumbing and heating materials markets. They have produced good returns over the years. I like the mix of business with exposure in the US and Europe and they should be unaffected by events in the Far East. With building material stocks currently out of favour, Wolseley, at 483p, is relatively cheap.
John Hatherly, M&G Investment Management. Tip: First Choice Holidays100p
First Choice, the UK's third largest tour operator, is on the mend and well placed to benefit from the buoyant demand for holidays and changes in the structure of the industry. The present management team has brought stability to the group, enabling it to exploit its strong market position.
Profits for the year to October 1998 are forecast to increase by roughly 50 per cent to around pounds 30m, implying a p/e ratio of just 13 times. Operating margins of 1.7 per cent are moving swiftly towards the 4 per cent norm for the sector. The changes in the industry should favour First Choice.
Mike Grimble, Norwich Union IM.Tip: British Airways 560p
British Airways offers good prospects for a rebound, having underperformed by around 23 per cent in 1997. Industrial relations problems have plagued the stock in the last 12 months and merger talks with American Airlines have also unsettled confidence. If the merger goes ahead the share price should bounce.
The move into budget airlines is unlikely to be seen as influencing profits enough to affect the share price this year. The shares have reacted to all negative news so far and look set to fly in '98.
Vanessa Williams, Legal and General. Tip: Unilever 521p
Unilever has built dominant market shares in products as diverse as margarine (Flora), detergents (Persil) and ice cream (Magnum). Under the leadership of Niall FitzGerald it has started to focus more clearly on creating shareholder value. Unilever has been shedding non-core business and making bolt-on acquisitions such as a Brazilian ice cream maker.
With an exceptionally strong balance sheet we expect this process to continue. Although the shares have performed well in 1997, anticipating the benefits of the new strategy, we expect further performance in 1998.
Robert Talbut, Royal Sun Alliance. Tip: EMI 508p
Since the euphoric highs reached at the time of the demerger, EMI has significantly underperformed. This has been related not only to the lack of a bid but also to some reappraisal over trading conditions. The turmoil in Asia has precipitated further weakness.
However, trading on only a small premium to the market but with an above- market yield, the shares now offer real long-term value. The company has had to enact some far reaching restructuring of the US business, where industry trends tentatively indicate some improvement. Elsewhere, general trading should produce earnings growth in line with (still to be further downgraded) general market expectations. Finally, EMI could well be party to the closer integration of entertainment media.
Colin McLean, Scottish Value Management.Tip: British Energy, 423p
While events in the Far East have increased risk internationally, domestic businesses should do well. British Energy, the nuclear power generator, has already been outperforming. This has taken it to a market capitalisation of over pounds 3bn, and into the FTSE 100 index, but the shares are still cheap. Institutional investors still have relatively low exposure to the company, privatised in 1996, which is now demonstrating much better than expected profitability.
It is benefiting from the extension of the remaining life of its eight nuclear power stations, which it must ultimately decommission, as well as from increasing output and cost savings.
Bernard Clark, Hill Samuel AM. Tip: Ockham Holdings 104.5p
The restructuring of the Lloyd's insurance market is creating opportunities in the new Lloyd's vehicles and the quoted managing agents. Ockham Holdings comes into the latter category. It is now left with the management of the specialist motor insurance syndicate, Highway, and the private client stockbroker, Wise Speke.
The company recently completed the acquisition of 46 per cent of the underwriting capacity provided by Highway (pounds 100m) and indicated its intention to further build up its directly-owned capacity. It has a good cash position which should be augmented if it sells Wise Speke. At the current price of just over 100p, capitalised at pounds 50m, there is scope for a 50 per cent rise without a sale of Wise Speke, or more with a sale.
Fund managers may hold some of the above stocks and deal in them.
How they performed in 1997
Tipped at Price now Gain/Loss
British Gas 224.5p *363.5p +62%
AEA Technology 396p 538p +36%
British Aerospace 1280p 1735p +35%
Sainsbury 388p 509p +31%
Cairn Energy 417p 496p +19%
GEC 382p 394.5p +3.3%
Barclays Unicorn Prop 257.6p 264p +2.5%
Skyepharma 73.5p 54p -25%
Average performance +20%
FT All Share 2013.66 2411.00 +20%
FTSE100 4118.5 5135.5 +25%
*aggregate of BG and Centrica prices following demerger in February
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