Investment Column: Copper market key to Kazakhmys shares
AstraZeneca; Mitchells & Butlers
Friday 30 January 2009
Our view: Cautious hold
Share price: 233.75p (-8.25p)
The good news from the Kazakhstan-based copper miner Kazakhmys yesterday was that production in 2008 hit targets.
This is a creditable performance, especially since the group had a tough first quarter. However, the company also announced that it was planning to cut production in the next year to take account of falling worldwide demand: while copper is great when things are going swimmingly, it is not the best metal to be mining when things turn sour. The price of copper has fallen by about 60 per cent since last summer, which is only slightly less awful than the 79 per cent drop in the value of Kazakhmys's shares in the last year.
There are a number of reasons why mining investors might fancy a punt, however. While the group will not say never, it is unlikely to be offering a rights issue, unlike Xstrata, which yesterday announced it is hoping to raise £4.1bn from shareholders.
Buyers are also in theory offered some protection against volatility by virtue of nearly 54 per cent of the group being held by the chairman, Vladimir Kim, and the Kazakh government, although the graph of the stock's performance somewhat undermines this particular thesis.
No matter how you dress it up, demand for copper, and therefore its price, is not likely to improve too much in the next few months, and possibly longer. The group has cut costs, and that will help, and it is also undervalued, say watchers at Citigroup. "After stripping out the value of ENRC [another Kazakh miner in which Kazakhmys has a 26 per cent share] and the power assets, the market is deeply discounting KAZ's copper assets relative to peers," Cazenove notes.
A bet on Kazakhmys is ultimately linked to a bet on the price of copper, and we would argue that it may stay depressed for a while. Cautious hold.
Our view: Buy
Share price: 2,680p (-180p)
It was not a great day for AstraZeneca shareholders or employees yesterday. The stock fell 6.3 per cent as the UK's second biggest drugs group announced its full-year results, saying that 2008 profits were up 13 per cent, while the group confirmed that it is axing 6,000 jobs over the next four years.
Investors have long been told that the pharmaceutical sector is good for their financial health in the midst of the recession: people still fall ill, and with drugs paid for by the state, or medical insurance, treatments cannot be considered a discretionary spend. Buyers of AstraZeneca shares have celebrated a 33 per cent rise in the stock over the last 12 months, which ranks as one of the best performers on the FTSE 100.
Investors should note, however, that operating profits were down yesterday after the company said asset impairment charges, including a $115m charge relating to its Pulmicort Respules, hit core profits, and while this does little for the numbers, investors should wonder whether this will be detrimental to the stock in the longer run.
A worry for all pharma groups is the threat posed by generic competition, with some watchers saying that the pipeline of new drugs cannot grow fast enough to offset the rate of patents expiring. Nonetheless, there is still value in the stock, which trades at a 28 per cent discount to the European pharma industry, according to analysts at Cazenove, and the sector is still likely to provide respite from more toxic sectors. The dividend is also up, and that should clinch it for anyone in doubt. Buy.
Mitchells & Butlers
Our view: Hold for now
Share price: 187.5p (+1p)
"It should be a winner," say watchers at Evolution of the pub group Mitchells & Butlers, which owns the All Bar One chain. Like Greene King yesterday, the company is one of the few pub groups that investors should consider, in what is otherwise a pretty nasty sector.
The group issued an update yesterday saying that trading in the 17 weeks to 24 January was "resilient, against a worsening trend of consumer demand, with like-for-like sales up 1 per cent". This really is a rather good performance, with a host of industry analysts lining up to recommend the group to clients. "Recessionary pressures are intensifying, beer sales are under pressure, costs are annoying and consumer demand is weakening. Nonetheless, M&B is well-positioned, is taking market share and... trades on about 9 times this year's earnings per share," say those at Blue Oar.
The problem that investors should seriously consider is that, like all other pub groups, the company is dependent on discretionary sales, and with the economy heading further south, at an increasing rate, we are nervous about the sector as a whole. We like Mitchells & Butlers, but we dislike the sector even more, and therefore would be cautious about any of the industry's stocks. That said, a general recovery should lead to a big boost for those holding the stock. Hold for now.
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