Investment Column: Go Forth and prosper with ports company

Wellstream; Brit Insurance Holdings
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The Independent Online

Our view: Buy

Share price: 1141p (-38p)

after a tempestuous half-year, Britain's only listed ports company published a pre-close trading statement yesterday forecasting results well ahead of last year. Forth Ports – which owns and runs seven facilities including Grangemouth, Rosyth and Tilbury – is still smarting from the collapse of takeover talks with major shareholder Northstream, a consortium which includes Arcus European Infrastructure, Peel Holdings and RREEF. It upped its bid twice before walking away at £14 per share, valuing the group at £640m, in late May.

Forth's management maintained that the offer undervalued the business and specifically the potential of a 400-acre plot the group owns on the Edinburgh foreshore. But the share price plunged by more than £1 nonetheless. The good news is that Northstream still owns more than a quarter of Forth's shares, so the door cannot be completely closed. In the meantime, progress is good.

Although short sea containers at Tilbury are still behind last year's levels, and container volumes at Grangemouth are flat, forest products tonnage has "increased substantially" with animal feed also on the rise. The group has slashed costs and boosted efficiency as well. Perhaps most important of all, enquiries for additional dry and liquid bulks and offshore renewables have increased markedly.

Better still, Forth's Nordic recycling business has seen a boost from improving commodity prices. Plans for the development of Leith Docks were approved last week, and plans for a biomass power station, in a joint venture with Scottish and Southern, have been submitted. Notwithstanding a forecast multiple of 21.1 times 2010 earnings, Forth looks well-placed with good earnings certainty, increased new business, a big surplus land bank and a fledgling but exciting renewables business. Acquisition or not, Forth Ports looks strong. Buy.

Wellstream

Our view: Hold

Share price: 440p (-63p)

The Gulf of Mexico spill has claimed a host of casualties, and the environmental impact makes trifles such as the impact on BP's share price look relatively unimportant. Still, this is a column about shares, so we have to look at the business impact, which has been far-reaching. Wellstream issued its trading update yesterday and the oil services group, which specialises in flexible pipes, was not involved in the spill.

But while there's no question of a direct hit, the Deepwater Horizon explosion has triggered uncertainty throughout the industry, not just in the Gulf – something which was plainly acknowledged by the company. We think it is likely to weigh on the sector for some time as investors await more clarity on the road ahead.

On the plus side, the update was accompanied by news of a major contract for an offshore development in Brazil, where Wellstream is doing well. Beyond Brazil, though, the picture remains less than inspiring, with "smaller awards and a continued lack of visibility". All this will, of course, change when the oil services industry recovers. And that will happen. The problem is that the Gulf of Mexico incident seems to have hit sentiment, which in turn may delay the uptick. With the shares trading on 12 times Evolution's forecast earnings for 2011, this is not a sell. But, given the issues raised above, it isn't a buy either. Hold.

Brit Insurance Holdings

Our view: Sell

Share price: 887.5p (-17.5p)

There's a high degree of uncertainty about Lloyds insurer Brit, which firmly rebuffed a takeover from Apollo Management. The fact that its shares now sit at just above 900p suggests that there is little expectation of a white knight, and scant hope of more money from Apollo. There have been suggestions that a bid of £11 a share would meet support – roughly equivalent to the end-2010 expected net tangible asset value per share. But that might be an over-estimation: employee share plans would crystallise in the event of a takeover, which could reduce this by as much as 50p, depending on the number triggered.

It's interesting to note that there has been no request for a "put up or shut up" to the Takeover Panel which would force Apollo to either go hostile or walk away. In our view, £10 was a good opening offer, and certainly a basis on which to hold talks. There are too many Lloyds insurers, and too many trading at a discount to assets.

Shareholders should push for an acceptance of any bid of £10.50 or so. But in the absence of any move towards talks, we'd sell these shares.

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