Investment Column: African Barrick keeps its golden glow

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African Barrick

Our view: Buy

Share price: 503p (-8p)

African Barrick Gold proved itself one of the most resilient of the blue-chip stocks last night. This was because an update on the gold miner's Nyanzaga project in Tanzania said that drilling had shown "further successful intersections on the southern extensions with several broad, higher grade zones of gold mineralisation".

Translated into English, this means that the project now looks as if it might bear more and higher grades of the yellow metal than previously thought.

This is clearly good news, both for ABG and for those who have put their money in the stock. It adds to confidence and bolsters the case for long-term growth.

But given that we're talking about a gold miner, we think investors should also remain mindful of one key short to medium term factor – the gold price. The combination of sluggish growth, monetary easing and persistent sovereign debt woes have continued to drive money into the shiny stuff, which is changing hands at well above $1,300 per ounce. Demand is such that yesterday China gave the green light to the country's first mutual fund that bets on gold prices.

The question is whether the prices will hold up or whether investors will feel the itch to take profits in coming months. We suspect the latter, not least because of the US Federal Reserve, which recently unveiled plans to pump yet more money into the US economy. That said, we would be wary of gold stocks that are already highly valued – and this is where ABG comes up trumps.

Using spot gold prices, JPMorgan Cazenove puts the stock on under 10 times forecast earnings for next year. That compares with nearly 13 times for other UK-listed gold and silver stocks. ABG is more than pricing in any risk of a short-term fall in the gold price. Added to its growth prospects, this is a buy.

Phoenix IT Group

Our view: buy

Share price: 235.5p (+6.75p)

Phoenix, appropriately enough for a company named after a bird, believes the future is in "the clouds". The Northampton-based company offers its business clients outsourcing services and is well placed for what it says is "the move to a new era in IT infrastructure, sometimes known as the cloud". What makes the cloud attractive is that it means companies do not need to maintain their own servers; instead all the data is hosted on the internet. Phoenix firmly believes this business is going to take off. The technology company released solid first-half results yesterday, which showed growth across its operations. Revenues rose 13.4 per cent to £138.4m, although pre-tax profits were up just 2 per cent to £15.1m. Net debt was reduced from £78m to £63.5m. While its public sector clients have been affected by cuts, the company says that the trend for outsourcing "remains positive" elsewhere.

The price-to-earnings rating of the stock is an undemanding 7.7 times estimated earnings in 2011, according to Investec. Analyst Gareth Evans said he was encouraged by the company's 60 per cent interim dividend increase, calling the updated full-year forecast of 10.5p an "attractive yield to income investors, and a material signal of management's confidence". Buy.


Our view: Hold

Share price: 419.75p (+15.25p)

Playtech's been on the slide recently. We first tipped the shares last September when they traded at 347.75p, although our last buy tip at 478.25p in February looks less happy. All the same, there are many factors working in Playtech's favour. The group is a business-to-business outfit that provides the infrastructure (software) for firms offering gaming products, such as online poker and bingo.

Online gaming companies come with a big risk because, while most of those quoted in Britain have pulled out of the US, they are still wont to offer their wares in territories whose regulators don't like them much. So there is always the danger of a nasty hit.

Won't this hurt Playtech? Up to a point (although it won't be affected by fines and its executives aren't in any danger of jail time).

But it has shown a proven ability to make money in regulated markets, such as the UK and Italy, and yesterday launched an online gaming service with the Finnish state operator, RAY.

The Playtech model works. At 16.5 times 2011 earnings, it's not cheap. But it offers great exposure to the growth of online gaming with none of the risks. Keep holding.