Our view: Buy
Share price: 91p (-4.25p)
Any investor prepared to believe UK Coal's plans for production hikes at several of its sites in the coming years (and that coal prices will hit the expectations of most pundits) should have a bet on the group.
The problem is that from where things stand today, the company does not look that impressive. Coal prices have suffered in soft international markets, which the group can do little about, and revenues have fallen: approximate year-to-date earnings of £255m are well below the £292m achieved last year, while a fatal accident at UK Coal's Kellingley mine in North Yorkshire last week will also lead to closures for about a fortnight, with more declines in revenues expected.
This has made UK Coal a dangerous place to park your money recently. Any cash is earmarked for investment, and the finance director, David Brocksom, predicts that a dividend is at least two years away. The share price itself has jumped around, reflecting the volatile prices.
UK Coal has, however, a strong following among analysts, most of whom agree that the stock – trading on a 2010 enterprise value to Ebitda of 8.4 times – is cheap. Couple this to the potential of some of the assets it plans to exploit in the next two years and predicted rises in the coal price, and the group is a nailed-on buy, they say.
The company has certainly made financial improvements. Last month it raised £100m through a rights issue, paying down and restructuring its debt, while it has also managed to achieve a decent price, despite the choppy markets, for its contract coal.
We certainly prefer some of the bigger international miners, but there is still potential for profit in the Yorkshire hills and, while UK Coal continues to look speculative, investors that buy now could do very nicely indeed. We think UK Coal could be a core bet once a dividend is paid. Investors will eventually want to buy, and at these levels it could be too tempting. Buy.
Our view: Hold
Share price: 45.75p (-3p)
Investors in Scotty, the video communications group which issued interim results yesterday, have endured a bumpy ride of late. The shares, which were changing hands at about 42p a piece at the beginning of this year, tumbled to about 35p in April, before rallying to about 70p in May. They came back down to earth in July, touching 41.5p at the end of the month, and last night were trading at about 46p.
So is it worth a punt? Profits have been climbing, with the company clocking up £239,000 in pre-tax profits for the second half of the year, compared with £89,000 in the first half. Turnover is also on an upward trend. And last week the group won a €1m (£916,000) positioning and communication equipment contract from Eurocopter, a division of EADS, the defence and aerospace group.
On the downside, the probable public spending cuts – both in the UK and elsewhere – pose a threat to Scotty, which focuses on the government and defence markets. It may end up in the firing line as politicians vie for the mantle of fiscal responsibility. In short, while the company seems to be on the right track and the shares remain well off their highs, the risks weigh against the Buy case. We say Hold.
Our view: Sell
Share price: 300p (+14.75p)
The success of pawnbroker H&T is a rather depressing sign of the recession. People in dire need of money appear to be beating a path to its doors in an attempt to get credit because they cannot get it anywhere else. Then there is the sky-high gold price (another consequence of the downturn), which has enticed another group to offload old jewellery with the aim of turning a quick buck. The latter activity is what is pushing the group's profits above expectations.
Gold, however, will not remain at its elevated levels for ever, particular as investment markets recover, and opportunistic selling may prove to be just another fad. Then there is pawnbroking itself, which H&T has turned from cottage industry into industrial enterprise via its chain of shops. It has been growing fast, but it is doubtful that the pace can be sustained, whatever the company might say. Arbuthnot has H&T trading on 13 times 2010 earnings. The yield is neither here nor there at about 2.5 per cent.
Those who have ridden this pony up have done well, but we are sceptical over whether it will be able to keep up the pace over the next 12 months. Keep the gold and sell the shares. Sell.