Investment Column: Chemring defensive in dangerous times

Alkane Energy; Alliance Pharma

Our view: Buy

Share price: 2160p (+170p)

We don't always get it right, but those of you who followed our advice towards the end of last year, when we first suggested buying Chemring shares at 1613p, can certainly afford a cheer.

The stars still seem aligned for the defence group, which makes consumable counter-measures and "energetics", such as flares. The public sector is its biggest client in a host of different countries, and it makes 60 per cent of its revenues in dollars and euros.

According to Chemring's brokers at Investec, turnover will reach £470m this year, up from £350m in 2008. The group's orders are up 39 per cent.

Yes, the stock has appreciated at a terrific rate in the past few months but, according to analysts at RBS, it is still worth buying. "The shares are currently trading on a October 2009 price earnings ratio of 10.1 times, and enterprise value to Ebitda of 6.7 times," they say. "This is still a significant discount to [a] number of larger, but in our view, lower quality peers in the FTSE 350 aerospace and defence sector[s]."

The shares are about as defensive as you get in these markets and, while we would not advise sitting on the stock indefinitely, if investors think the downturn will last for the foreseeable future, Chemring shares are worth keeping hold of.

Barring anything unexpected, and there was no sign of anything untoward yesterday's trading update, the shares will have a bumper 2009. Buy.

Alkane Energy

Our view: Buy

Share price: 16.5p (+1.75p)

You have to take your hat off to Alkane Energy. For good reason, and despite the misery for some companies in the continuing recession, it is upbeat about the future and says it is having no trouble in attracting investors, at least to meetings.

The Aim-listed company specialises in building and operating methane extraction plants, largely at disused mines in the Midlands. Alkane says the energy is clean and, with stellar full-year numbers announced yesterday, no debts and the price of its energy fixed for another year, the group is confident that its investors will benefit from holding the stock.

Neil O'Brien, Alkane's new chief executive, says he is excited about the future and that for the first time since the collapse of Lehman Brothers, he has filled up his diary for the next few days with meetings in the City – a sure sign that confidence is returning, albeit gradually. Whether this is the case is in our view questionable, but that does not detract from the fact that investors are prepared to listen to solid small caps with a good story. Alkane will start more projects this year, and the resultant power will not be locked in at current market levels, allowing the group to take advantage of higher energy prices in the coming year, Mr O'Brien says. A new site costs an average of £2.5m, and Alkane says it has enough cash in the bank to cover at least three projects this year.

There are clearly compelling reasons to buy Alkane shares. The big white elephant in the room, lest investors forget it, is that as a small-cap company, Alkane will suffer disproportionately with any slight change in sentiment. The shares rose 11.7 per cent yesterday and experts at house broker Brewin Dolphin predictably say the stock is a buy with a 24p price target. We would tentatively agree that they will rise. Buy.

Alliance Pharma

Our view: Hold

Share price: 8.25p (+1.1p)

To a casual observer, Alliance Pharma may not look too different to how it did two years ago. The chief executive, John Dawson, would disagree, saying that the group's marketing strategy has changed and, with a new venture capital investor, MVM, on board, the need for cash from outside to fund all-important acquisitions, has gone. The difference, Mr Dawson would argue, is reflected in its share price – up 75 per cent since December.

The group specialises in buying established, off-patent drugs that do not make enough money to attract generics firms. Yesterday, it published its full-year results, saying its pre-tax profits were £2.4m – up from a loss of £3.2m last year. Most significantly for investors, the group said it expects to start paying a dividend within the next 12 months. Despite the shares trading 15.8 per cent higher, analysts at house broker Numis reckon the stock is still undervalued. They said the shares were worth 11p, based on an average of sector peers' enterprise value to Ebitda.

While acknowledging that the shares have performed well in recent months, we see few catalysts from here. We would wait for some softening in the share price before buying. Hold.