Investment Column: Await deal clearance before buying Cairn

Xaar; Severfield-Rowen


Our view: Hold

Share price: 428p (+8.3p)

The stock market fell on Tuesday, but Cairn Energy rallied to second place on the FTSE 100 index as investors bought in after the oil prospector issued what by all accounts were pleasing full-year results.

The update showed that the group moved to a pre-tax profit of $577m (£352m) last year, against a small loss in 2009. Cairn also reported progress in Greenland, where it is conducting a widely watched exploration campaign. The group said the offshore-Greenland programme has "the potential for transformational growth" and, given its track record, there is every reason to believe in its optimism.

Despite all this, we suspect that the share-price rise was mostly down to comments from chief executive Sir Bill Gammell, who said: "Cairn continues to believe the necessary approvals to complete the Vedanta transaction will be received and is working with the government of India in a positive and constructive manner".

The Vedanta transaction refers to Cairn's deal to sell control of its Indian arm, Cairn India, to the mining group Vedanta Resources. The transaction requires clearance from the Indian government, which has yet to make up its mind. Every week brings forth new reports of possible cabinet meetings or ad hoc statements from officials, but the issue has not been resolved. Even David Cameron has weighed in, mentioning the deal in a letter to his Indian counterpart, Dr Manmohan Singh.

That Cairn expects the deal to go through is of course a good thing. Earlier this month, the company said it hoped to conclude the divestment by the middle of next month. We are in no position to judge whether this deadline will be met, as it hinges on the actions of the Indian authorities.

What is clear – and this was highlighted by RBS analyst Phil Corbett – is that both companies appear committed to the deal, and would be unlikely to hesitate if a small extension were required.

The results showed that Cairn is a strong business. The Greenland campaign offers the potential for substantial upside gains. But although we were cheered by Cairn's confidence, we would not add to our holding until we have further clarity from the Indian government on the Vedanta deal.

Xaar

Our view: Buy

Share price: 234p (unchanged)

Xaar may sound like a baddie from Star Trek but it is actually in the business of making industrial ink-jet printheads. It suffered a tough credit crunch, but last night's results showed that it had regained its composure and booked healthy profits for 2010.

The boost followed strong demand for its industrial ink-jet kit, with the company saying that orders for certain products were so high that it could not keep up with demand. To meet the rush of orders for its so-called Platform 3 products, which are particularly beloved by the ceramics industry, the group raised £14m in a placing to expand its Huntingdon facility.

The shares are currently valued at a heavy multiple of 26 times forward earnings, but that falls to 17.6 times on the estimates for the following year. Given the forthcoming increase in capacity at Huntingdon, we think there is scope for gains.

Severfield-Rowen

Our view: Hold

Share price: 251p (+19p)

There was much to be gloomy about in Severfield-Rowen's final numbers, yet the fact its shares closed ahead last night shows the extent to which investors were prepared for the bad news by the structural steelwork supplier's profit warning in January.

At the time, it blamed delays to large office-building projects, a drop in public spending and the increased cost of steel, and yesterday's comments from the group made clear that 2011 will continue to be tough.

However, it is not just its involvement in the 2012 Olympics – its structural steel has been used for the main stadium – that means it is looking forward to next year.

There is optimism over its Indian joint venture, as well as commercial activity in the UK. It also used the economic downturn to double its market share, so if you hold the stock and are happy waiting, there certainly appears to be light at the end of the tunnel, despite the reduction of the dividend.

That said, given the pessimism regarding the coming months, if you are itching to get involved it may be better to wait for further weakness in the share price before wading in.

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