Investment Column: Britvic will add some fizz for stockholders

Melrose Resources; Alphameric
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The Independent Online

Our view: Buy

Share price: 305.5p (+8p)

The sun shines, ergo, the drinks companies do rather nicely. When the group in question owns the Robinson squash brand and Wimbledon turns out to be more entertaining than usual, you would expect it to release good news to the market.

Paul Moody, Britvic's chief executive, rightly points to more important factors that have contributed to the company outperforming the industry, and announced yesterday in a market update that the group expects to beat consensus Ebit numbers for the full year. Promotions and other strategies have helped, Mr Moody says, and the outlook for the next 18 months is rosy, especially given Britvic's international expansion plans.

It is very difficult to argue with the figures – Britvic will better even Cazenove's top-end bet of £108.4m of Ebit – and those investors looking to back companies on a march should take a serious look, especially since a number of the analysts also point out that the shares are undervalued.

But that is where our doubts begin to creep in. Mr Moody says the market will do what it will do; all he can do is continue to run the company well. True, but that does not necessarily mean investors should buy a share that seems to have stalled.

Britvic shares reacted reasonably well to yesterday's statement, closing the day up 2.7 per cent, but we would still be concerned that the stock comes in below the level of Britvic's peer group – those at Nomura, for example, point out that Britvic shares trade on a 2009 price earnings ratio of 10 times 2009 price, versus the soft drinks sector on 13.2 times.

Investors can view a discount as a reason to jump in, or be cautious. We would be optimistic that Britvic is likely to have a good time of it over the next 12 months, and would take a punt on the market catching up at a later date. Buy.

Melrose Resources

Our view: Buy

Share price: 261.25p (-12.75p)

The problem with trying to pick oil and gas stocks is that the shares tend to follow movements in the oil price.

Yesterday Melrose Resources, the exploration and production group, said in its interim trading update that it would hit expectations for the first half. Good, but if you look at a graph of the stock's performance, it ebbs and flows pretty much in line with the price of the black stuff, suggesting a punt on the stock is little more than a directional bet on the price of oil. Sadly, most expect oil to remain volatile for the next six months or so.

Apart from the group's debt, which we are less concerned about than the market, and which ensures Melrose's stock has a pretty hefty discount to the rest of the sector, the group has some exciting projects in hand.

An equity placing announced by the group yesterday is intended to raise £11.2m to speed up the drilling of its Kaliakra appraisal well in Bulgaria and its Egyptian field development.

It is the Bulgarian gas projects, however, that are really exciting, especially with the Sofia government terrified that Gazprom, the Russian energy giant, will turn the taps off again as they did last new year, starving much of Eastern Europe of gas.

Even accounting for the correlation with the oil price, we think there is a strong investment case.

The shares might do little beyond the oil price, but the yield is among the best in the sector. Buy.


Our view: Buy

Share price: 29p (-1p)

Bookies are proving relatively resilient in the recession, which is good news for the betting industry technology company Alphameric. Some 95 per cent of them now buy into Turf TV, which provides racing pictures to betting shops through a joint venture with several race courses. A rather nasty court battle with its main clients has been all but won, and the company is back in the black and paying dividends again.

It is not all good news. Alphameric Solutions, a silly name for providing various services to bookies, is under the cosh because the recession means clients are keeping a tight rein on costs and the shares have recovered sharply since January, meaning that much of the good news is in the price. Still, Joe Lewis, the super-rich investor who also has a stake in Ladbrokes, has been increasing his stake – a fact that is worth watching closely. The valuation, at 9.8 times this year's forecast earnings, is undemanding, and the yield, at 5.5 per cent, is good. Buy.