Investment Column: Can Johnson Matthey's surge continue?

Tullow Oil; Charles Stanley
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The Independent Online

Our view: Hold

Share price: 1478p (-29p)

Despite our best efforts to persuade them not to buy the shares a few months ago, investors in the speciality chemicals group Johnson Matthey have had a thundering good year.

The stock has put on nearly 70 per cent, and with a dividend yield of 2.7 per cent, investors are getting plenty of bang for their buck.

In April last year, we were persuaded that the economic downturn would hit the company's sales, and as a result the stock would stall. Instead, the recession had kicked in and investors clearly saw the group as a defensive bet and steamed in.

The company yesterday issued its third-quarter trading statement, saying that its key markets were recovering and that operating profits were up 10 per cent on this time last year. On the face of it, then, Johnson Matthey has seen off the worst of the global downturn, and if growth recovers, as most expect, it will be well-placed to cash in.

Of course, there is an alternative view. While we would not recommend to sell the shares, as we did last April, Johnson Matthey's shares' strong run has left it looking pricey compared with its peer group.

They trade off about 15 times forecast earnings in 2011. That does not compare favourably with the pan-European sector average of 11.5 times, even taking into account the fact that upgrades are looming.

Robert McLeod, the group's finance director, insists that the stock is good value, and that other analysts say the stock is undervalued. But then, that's the answer you would expect to get from a senior executive. You'd rightly be worried if they said anything else.

There are few bigger in the speciality chemicals sector than Johnson Matthey and size matters in this sector.

However, at the risk of missing another charge in the shares, we'll say just hold for the moment. Buy on any signs of weakness in the shares.

Tullow Oil

Our view: Buy

Share price: 1160p (-56p)

Tullow Oil, fresh from blocking ENI's plans to acquire Heritage Oil's lucrative Ugandan assets, successfully placed 80.4 million new shares, or around 10 per cent of its share capital, to raise £925m last night. The money will come in handy as Tullow, together with a yet-to-be-determined partner, exploits the Ugandan reserves. Though there have been some concerns about whether the Ugandan government will approve of Tullow's move, the company says it's on track, and, given last night's placing, we're quite happy to side with it.

Tullow has proposed to bring in either China's CNOOC or France's Total to help develop the assets and further out could potentially spin off the Ugandan development the way Cairn Energy floated its Indian arm.

Of course, Uganda is only part of the story. The injection of funds will also help in developing the company's activities in other parts of Africa. We're confirmed fans of Tullow. It has performed strongly, and the shares are up almost 18 per cent since the end of July last year. Cautious investors will rightly wonder if it's time to lock in some profits.

We think not. First, the shares have underperformed in recent sessions amid the concern about the Ugandan government's stance on the Heritage move. Yesterday's developments should see off these worries. Second, the company looks well-placed to invest in new opportunities, not least because of its track record, which should ensure continued investor appetite for the stock. While Tullow trades on a huge multiple (162.1 times Evolution's forecast full-year earnings) that's only because the company just keeps delivering. We said buy twice last year, and Tullow has rewarded us handsomely. There's enough here to suggest this tiger can be ridden higher still. Keep buying.

Charles Stanley

Our view: Buy

Share price: 244p (+5p)

After a strong recovery from its nadir during the financial crisis, Charles Stanley's shares have been treading water. The broker and asset manager, however, yesterday produced an optimistic-looking trading statement that could spark some life into the stock.

For the three months to 31 December 2009, the third quarter of its financial year, revenues were 5.2 per cent higher, at £28.4m. Client funds continue to flow into the business, and this is not surprising given that, although markets continue to be volatile, the returns from cash are paltry. The company has also decided that it's time to start hiring again – which, in the stockbroking world, can be interpreted as a sign of confidence.

A second interim dividend is on the way (which should avoid forthcoming tax rises) and, subject to market conditions, a final payout will see the total at no less than last year's 8.75p. The shares are rather illiquid, but at 11.9 times forecast full-year earnings with a prospective yield of 3.7 per cent, they trade at a discount to the sector. Prospects look good, so we say buy.