Investment Column: Back BG Group to keep its foot on the gas
Thomas Cook; Brewin Dolphin
Thursday 02 December 2010
Our view: Buy
Share price: 1,191p (+29.5p)
BG Group is still on a roll. Not content with its unprecedented string of exploration successes in Brazil's promising Santos Basin, the company yesterday announced a gas discovery at its Chewa-1 exploration well in Tanzania.
Chewa is the second of three prospects to be drilled off southern Tanzania, following a deal with Ophir Energy this summer, and there was a similar gas discovery at the first well, Pweza-1, last month.
It is too early to speculate about the size of the reserves, but Frank Chapman, BG's usually sombre chief executive, is almost upbeat. "This is an encouraging start to our campaign in Tanzania," he said yesterday.
Mr Chapman naturally expresses caution, but the two successive finds cannot be anything but good news – not least with rivals' successes nearby – and Chewa and Pweza add a further glow to BG's aura of success.
But Tanzania is not just about the razzle-dazzle of boosting reserves. The discoveries are also important strategically, underlining BG's commitment to exploration even as its growth plans focus on Brazil, US shale gas and Australian liquefied natural gas (LNG) all moving into production.
BG has plenty going on already. Last month's third-quarter results showing pre-tax profits of $1.39bn (£892m) were published alongside a higher estimate of the group's Brazilian reserves. Just days earlier, production started at the flagship Tupi well in Santos Basin, and BG also gave the formal go-ahead to $15bn plans for the world's first coal-bed methane LNG plant in Queensland. Even so, Tanzania helps to show that BG Group is still hunting out new opportunities.
BG shareholders have seen total returns of nearly 420 per cent since Mr Chapman took over as chief executive in 2000, according to Barclays Capital estimates. There are more to come. Keep buying.
Our view: Buy
Share price: 178 (-8.3p)
Tour operators will want to forget 2010. Like its rivals, Thomas Cook has had to contend with the Icelandic volcanic ash cloud disruption, subdued travel during the football World Cup, hard-pressed consumers shunning holidays or leaving their booking till the last minute, and big cuts to its winter capacity.
Despite all this, Thomas Cook's full-year pre-tax profits only fell by 7.5 per cent to £41.7m, on revenues lower by 4.1 per cent at £8.89bn for the year to 30 September. Analysts also saluted higher-than-expected UK cost savings of between £40m to £50m to be delivered by 2012, alongside a modernisation programme for its aircraft.
Even better, from existing investors' perspective, the tour operator is holding its total dividend at 10.75p.
That said, Thomas Cook admits that the trading environment in the UK "remains uncertain". Furthermore, the merger between the Thomas Cook and the Co-operative Group's high-street travel agency and foreign exchange businesses, which it unveiled in October, could lead to integration headaches in the year ahead. Still, we believe that shares in Thomas Cook, which have taken a battering this year, now look cheap on an earnings multiple of 7.2 for next year. Buy.
Our view: Buy
Share price: 148p (+2.25p)
The financial services group Brewin Dolphin trades on pretty thin multiples. Arden Partners puts the shares on less than 10 times forward earnings for next year, which is hardly demanding, especially in light of a forecast yield of more than 5 per cent. Sector peer Rathbone, on the other hand, trades on multiples of more than 18 – yes, 18 – times. Rathbone is a strong business, and deserves a premium rating. But that gap seems far too wide, particularly in the context of yesterday's full-year results.
Brewin posted a healthy 43 per cent rise in pre-tax profits, which jumped from £21.9m to £31.4m. Funds under management were 13 per cent higher at over £23bn, while revenues jumped by 18 per cent to £250.9m. The gains came despite growth in red tape, with Brewin bemoaning a "material rise in the costs" of dealing with regulators.
Looking ahead, the company struck a confident note on outlook and, in an unusually dramatic turn of phrase for a results release, said it was "determined not be thwarted by increasing amounts of regulation". Putting the hyperbole aside, Brewin deserves credit for the strong performance, particularly in light of the weak valuation. Buy.
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