Investment Column: Cairn's prospects make it a worthy buy
Kazkhmys; Evolution Group
Friday 30 October 2009
Our view: Buy
Share price: 2762p (+36p)
After more than five years, Cairn India started pumping oil from its massive Mangala field in Rajasthan in August, setting it on the way to the 175,000 barrels per day it wants in production from next year. With economies still reeling from last year's credit shock, and the oil and gas sector hit harder than many, Cairn's focus on India looks like an even better bet than before. India, one of the few economies still growing at a vigorous rate, imports two-thirds of its crude oil. By 2011, one fifth of its needs will be met by Cairn's Rajasthani assets.
The company's results for the second quarter to September, published yesterday, show grounds for optimism. With profits of 4,695 million Indian rupees (£60.1m), financing arrangements of $1.6bn (£966m) for Rajasthan in place and net cash of about $700m (£422m), the balance sheet looks strong. Then, last week, Malaysia's Petronas bought a 2.3 per cent stake in Cairn India for $240m (£144m), taking its holding to nearly 15 per cent.
Then there is Greenland. With Cairn's Indian projects now ticking along, it is turning its energies to a series of blocks off the island for which it has great hopes. There is certainly considerable interest in the area. Exxon and Chevron also have assets there, and new blocks coming up for auction recently generated expressions of interest from 13 new players. Not only that, but the Petronas deal also included a 10 per cent interest in Cairn's Greenland blocks, and the $310m (£187m) raised from the deals will be spent on funding exploration.
There are always risks, but Cairn is bullish. David Nisbet, the company's commercial director, said: "Exploration needs a lot of luck, but you also need to have a position in order to test that luck. We have a position at a good table." Given that, a multiple of 16 times full-year earnings does not look to excessive (there is no dividend). So. Buy.
Our view: Buy
Share price: 1186p (+73p)
Success in mining is all about getting out of the ground what you say you will, and hoping the markets give you a decent price for it. Investors in the London-listed miner Kazakhmys saw its shares rise yesterday after the group said it expects to hit full-year production targets. And this is despite copper production, the company's main activity, being curtailed by maintenance work in the fourth quarter..
Kazakhmys shares have also benefited from a surge in copper prices, climbing 130.7 per cent in the past six months alone, making it one of the stellar performers on the FTSE 100. We think it ticks all the boxes: production is on target, despite a few hiccups, and while the shares may have surged in recent months, we think they still have some way to go. The stock is a proxy for the copper price, which we reckon will continue to grow, and the shares are still a long way short of the 1914p high achieved in May 2008, just before the commodity crash.
The company has lowered debt by nearly £200m in past two months, meaning the stock is trading at undemanding levels. Analysts at Liberum Capital said: "Kazakhmys is trading at an attractive [price-to-earnings ratio of] 7.8 times ." We agree. Buy.
Our view: Cautious buy
Share price: 159p (+7.4p)
As the bulge bracket firms teetered on the edge and Lehman Brothers keeled over, smaller brokers like Evolution Group suffered bruising share price falls last year. Since then, sentiment has improved as the worst of the financial storm has receded, with investors waking up to the enviable position of survivors. Evolution, which yesterday said it expected its full-year profits to exceed current forecasts, has made the most of the new reality, capitalising on the opportunities presented by the struggles of rivals.
Beyond investment banking, the private client business has grown, with funds under management and administration reaching £5bn at the end of September, up 19 per cent from the end of June. The strength of the business is reflected in the stock, which has risen sharply and now trades on 21.9 times Arden's full-year forecasts.
But we think Evolution can grow stronger and the stock should climb higher. Management is competent rather than inspired, and the group has had something of a chequered history. But at the height of the crisis last year it saw off interest from numerous potential bidders to snap up Kaupthing, Singer and Friedlander's private client business for a song.
Maybe there is more to the top table than meets the eye. Wea re cautious, but give Evolution the benefit of the doubt for now. Buy.
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