Investment Column: Gem is risky but it could be worth holding

Bowleven; Aqua Bounty Technologies
Click to follow

Our view: Hold

Share price: 196.2p (-3.4p)

If London buses tend to come in pairs, then so does the good news for Gem Diamonds. Yesterday, it was that the company had negotiated a 25 per cent price increase for the rocks it sells to the jewellery group Tiffany. Last week, the group announced that it had found a 196-carat diamond in its mines in Lesotho – for the uninitiated, the rock in question is big, and expensive.

Sadly, for investors, all this good news has not translated into a solidly rising share price, with Gem's stock falling by more than 20 per cent in the past six months. By comparison, the similarly sized Petra Diamonds has seen only a 5 per cent decline during the same period. The recent falls have put the group well below the 255p-a-share level at which we advised investors to avoid the shares. That was at the end of last year when the company warned all was not well with the diamond market.

At their current level, Gem's shares now trade at a modest multiple of 14 times 2011 forecast earnings. We are also convinced that conditions in the diamond market are improving. The mining giant Rio Tinto's decision earlier this week to invest more than $800m (£510m) in a diamond mine in Australia is evidence enough of that happy fact. Gem doesn't pay a dividend, preferring instead to plough profits into its operations. It is a perfectly reasonable stance and in the long term, shareholders should see the fruits of the decision. But it also increases the risk, with investors having to rely on the shares reversing more than a year of falls.

The analysts at Panmure Gordon reckon that with Gem shares now trading 19 per cent below the group's deferred cashflow valuation, the stock should scale the heady heights of 240p. We would be less confident and see few catalysts to get the price moving, especially after yesterday's upbeat news did not translate into any momentum from the market. However, it might now be worth holding a few.


Our view: Hold

Share price: 165.75p (+4.25p)

Bowleven, the West Africa-focused oil and gas prospector which announced the start of drilling operations at the Sapele-1 exploration well in Cameroon, has a had pretty good year so far, with its shares up more than 80 per cent since the beginning of January. The gains would have been bigger had it not been for a sharp drop – most likely down to profit-taking – around the time the company said test results at its IE-3 well in Cameroon pointed to an increased likelihood of commercial development.

RBS reckons that further news on Sapele-1 should be forthcoming around late November or early December. City scribblers seem in agreement over the fact that a positive result here could be transformational for the company. But this suggests to us that the stock may struggle to make gains until the market receives confirmation either way.

That said, we'd hold on to the shares because Bowleven is also unlikely to give way in the intervening period. First, the fall in price since August seems unjustified and if the stock does not make a full recovery, the shares should remain firm at the very least. And second, Bowleven is often mooted as possible bid target. Sector peer Afren was recently named as possible suitor. Such chatter should provide further continuing support to the share price until we hear more on Sapele-1. Hold for now.

Aqua Bounty Technologies

Our view: Sell

Share price: 22.5p (unchanged)

Aqua Bounty Technologies does not like being labelled as the "Frankenstein fish" company, but its business of genetically modifying salmon means it is hard to escape the tag. The company modifies Atlantic salmon by injecting a gene from the Chinook salmon, so they grow much faster. It means the fish can reach market size in 18 months rather than the usual 30.

The Boston-based biotechnology group sees a strong opportunity in what it calls the "commercial aquaculture" industry (fish farming to you and me), which is worth $86bn (£55bn). However, yesterday it revealed a six-month loss of $2.5m (£1.6m), although there should be sufficient funds to take the company through to next summer.

The business case for investors comes down to whether the US approves the fish for public consumption, which would be a major milestone. Indications yesterday were good and it could be the first genetically modified livestock to be approved.

The problem is it won't ship until the beginning of next year, and as Nomura noted, the revenues for the whole year are likely to be negligible. With cash burn of $5m (£3.2m) a year and profits unlikely for three, it's too risky. Sell