Investment Column: Dechra takes the slow train to success

Kenmare Resources; Scott Wilson
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Our view: Buy

Share price: 414.3p (-14.5p)

Britain is clearly a nation of pet lovers, given the volley of good news from Dechra Pharmaceuticals yesterday. The FTSE 250-listed veterinary medicine group issued its preliminary results saying that adjusted operating profits were up 30.5 per cent, which was all nicely in line with management's hopes. Most importantly for investors, the board has recommended a 10 per cent jump in the final dividend, from 5.5p last year to 6.1p this time around. To top things off, the market continues to grow, the company says, albeit at a slower rate.

So you would be barking not to buy Dechra, right? On paper, certainly, it looks good.

However, we are concerned that the spike in equity prices in the last few months has completely passed Dechra by, with the stock at pretty much the same level as it was six months ago. Chief executive Ian Page argues that this is because the shares did not collapse when the world nearly came to an end in the midst of the financial crisis, and that over the last three years Dechra shares are among the best performers on the FTSE 250. We reckon, rightly or wrongly, that even long-term investors are stiffening their upper lips and steering towards racier stocks.

The experts are still behind the company. Those at Panmure Gordon argue that clients should buy. Its analysts have assessed the value of Dechra using the combination of methodologies which yield values of between 547p and 630p per share. Erring on the side of the more cautious estimate, they think the stock is worth 550p – substantially more than where it sits at the moment.

But trading on 16.7 times this year's forecast earnings, the shares are not hugely cheap, and even with the dividend hike, the prospective yield is only 2.1 per cent. However, there is still enough good news in the numbers to suggest that Dechra will continue to be a strong – and indeed defensive – performer over the coming months. So buy.

Kenmare Resources

Our view: Buy

Share price: $0.26 (unchanged)

With rather unfortunate timing, Kenmare Resources, an Irish mining company listed on the Alternative Investment Market, has been ramping up production at its Moma titanium minerals mine in northern Mozambique just as the global downturn sent commodities prices into a nose dive.

Titanium minerals – which include zircon and rulite, but primarily ilmenite – are used mainly in the manufacture of titanium dioxide pigments used in paint, paper and plastic. Demand is closely linked to economic growth.

While demand has been dipping, yesterday's interim results from Kenmare show ilmenite production up 12 per cent, zircon by 45 per cent and rutile by 158 per cent in the first half. And although the group recorded a $2m (£1.2m) loss, its performance improvement project is now 97 per cent complete, and Moma is on schedule to reach full production in the fourth quarter. The mine will then churn out 800,000 tonnes a year for the next two decades.

But timing could yet play to Kenmare's favour. The destocking that caused such problems earlier this year is showing signs of coming to an end, with demand expected to pick up from early 2010. Not only that, but the ilmenite market is growing at a steady 3 per cent a year, and Moma's low operating costs make it one of the cheapest in the world.

Though the stock has climbed steadily from the lows of December, and again in April, it is still not yet at last year's levels. And with a forward price-earnings ratio at a relatively undemanding 17.3, Kenmare is a buy.

Scott Wilson

Our view: Buy

Share price: 89p (+4p)

Scott Wilson is one of those contractors which do so many different things that it can be hard to get a handle on it. There's roads, rail, buildings, environment and natural resources in its portfolio with operations in the UK and internationally. Perhaps the most important point to draw from yesterday's trading statement, however, is that trading is holding up, with strong growth in road and rail, rapidly developing international businesses and a growing order book.

The shares also look cheap, trading on a forward multiple of just 5.6 times next year's earnings with a prospective yield of 4.7 per cent.

Of course, Scott Wilson is not in a high growth sector – it has been hit by problems in the commercial sector, and the fact that 55 per cent of its earnings come from a public sector that has to shrink is worrying. But compared to its international peer group, the valuation is very undemanding, and there is enough here to suggest that it is worth tucking a few of the shares away.

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