Investment Column: Emerging giants will fuel Xstrata's growth
Hot Tuna International; BTG
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Thursday 06 October 2011
Our view: Buy
Share price: 818.2p (+54.2p)
Like its rivals, Xstrata's shares have taken a hammering in recent weeks, which has left them down nearly 50 per cent this year.
After nearly doubling its profits last year and increasing them by 25 per cent in the first half of 2011, the recent commodities boom that fuelled Xstrata's bottom-line growth appears to have run out of steam, with prices dropping off severely.
So-called industrial metals, such as nickel, aluminium and zinc, are collectively down by 24 per cent this year. Copper, which is a key part of Xstrata's business as it is used for wiring, has been hit particularly hard, falling by 28 per cent this year.
But yesterday's rally in Xstrata – and in FTSE 100 mining shares in general – suggests that the Anglo-Swiss miner may not be in such bad shape as its share price suggests. It is certainly true that Western economies are in deep trouble, as Europe and the US struggle with debt mountains and austerity measures. Meanwhile, emerging markets may not be quite as robust as had been hoped just a few months ago.
But the longer-term outlook for the key industrial ingredients in which Xstrata specialises is good, with overall demand from emerging markets likely to grow strongly for years to come. Earlier this week, Goldman Sachs scaled down its 12-month forecast for the prices of aluminium, copper, nickel and zinc. However, it still expects the prices to rise considerably, predicting an increase of 20 per cent for nickel and 25 per cent for copper.
Goldman reached its bullish view after concluding that demand from countries such as China and India far outweighs the crisis in the West. And Xstrata is investing billions in developing new projects to enable it to take advantage of a boom that looks likely to continue for a good while yet, albeit it with the odd slump.
Since Xstrata is part-owned by Glencore, there have been rumours that the commodities trader could mount a bid. Whether or not an offer is forthcoming, the long-term outlook alone makes this miner one to buy.
Hot Tuna International
Our view: Avoid
Share price: 0.075p (+0.0025p)
The surfwear firm Hot Tuna has been suffering from a financial chill. Amid boardroom upheavals and cash calls, the company lost £1.4m in its last full year and was still in the red at the interim stage of this year.
With so much gloom in the world, there could be an appetite for thecarefree, surfer-dude image that the company would like to cultivate, particularly among the 15-25 age group which Hot Tuna targets. And yesterday's trading statement was not without positives.
For a start, orders from Amazon have risen by 30 per cent. The company has also unveiled a new e-commerce website together with a public relations, social media and marketing campaign. This quotes prices in euros as well as in sterling, making it easier to sell goods across the continent. Still, big questions remain.
For example, Hot Tuna has admitted that it has achieved "minimal" sales in the US, which is a worry when you make a big deal about operating your design, manufacturing, production, marketing and distribution in California.
Given the operation's recent turbulent history there are just too many question marks to make it a viable investment proposition at the moment, even for those willing to speculate. Keep a watching brief but avoid for now.
Our view: Buy
Share price: 265p (+27p)
BTG cheered investors yesterday, with the pharma group saying its full-year performance would beat analyst hopes. The business now expects to book between £160m and £165m in annual revenues.
We last backed the shares when they were worth around 224p. Today, they are higher, and there appears to be more to come. BTG's licence and biotechnology business is showing strength, boosted in part by some regulatory approvals. Other operations have also displayed signs of progress.
Moreover, valued at five times enterprise value to sales, the stock is pricing in some unreasonably bad news. As Peel Hunt pointed out, the shares reflect "worst case scenarios" for the Zytiga drug, which is selling well, the Varisolve varicose veins treatment, which will soon complete its phase-three trial, and the CytoFab drug for severe sepsis, which is in phase two trials.
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