Investment Column: Hold on for a copper stock's bumpy ride
Tullow Oil; Paddy Power
Thursday 27 August 2009
Our view: Hold
Share price: 752p (-37.5p)
For holders of Antofagasta, the last year and a half has been rocky, to say the least. From over 800p in April 2008, the share price yo-yoed down to below 300p in October, before swinging back up above 700p last month. In other words, after more than halving in the span of a few months, it has more than doubled. Why?
Part of the answer is to be found in the price of copper. Like the stock, copper prices have recovered steadily after sharp declines in the second half of 2008. From 132 cents (81p) per pound at the start of this year, copper prices rose to 232 cents at the end of the June.
Antofagasta acknowledges that the short-term copper outlook remains uncertain. China, so often the catalyst in commodity markets, has helped to drive the price, and demand has been robust. Still, the company admits that the significant level of copper imports into China partly reflects a build-up of inventories. The trend has also been supported by the lack of scrap availability, and interest from financial investors, thought to have waded back into the market after running for cover last year. But it may not continue.
So, what next for the share price? If the outlook for the copper price is any guide we expect volatility, although it appears too hasty to sell. Yesterday's interim results were slightly below expectations, with net earnings down 70 per cent at $235.7m. Evolution Securities thinks the yield will remain constant at 0.7 per cent to 2010, but the multiple is a toppish 34.5 times next year's forecast earnings.
Antofagasta is well positioned in the long term. But, with the commodity markets bedevilled by a lack of clarity regarding the trend in China, and traders still nervous about the world economy, the share price appears vulnerable. We suggest investors buy if they trade sharply lower. In light of the strength in recent months, however, our core recommendation is to hold.
Our view: Buy
Share price: 1053p (-43p)
Tullow Oil's results were more or less in line with expectations, but that's not really the point. As the team at Bank of America-Merrill Lynch gushed, the company's update provided "further evidence of the company's exceptional exploration potential". The 81 per cent fall in profits, to £34.8m, is largely down to the weak pound and oil price, but the analysts' swooning was down in part to Tullow's 100 per cent-owned Ngassa-2 well in Uganda, which has hit oil. The company is still evaluating the prospect, but given the large enclosure of the discovery, Merrill reckons that the final tally may exceed pre-drill estimates. Tullow plans to sell part of its stake in the block to bring on a partner with expertise in areas such as building pipelines – sensible, as its skills lie elsewhere.
Meanwhile, over in Ghana, the Jubilee phase 1 development is on track for start-up in the second half of next year.
If all that sounds good, it is because it is good. Merrill's 1178p target price is in line with its base case estimate for total NAV, or net asset value, and this offers a nice upside to the current share price. The shares have come back strongly since relaxing with the wider market in the fourth quarter. We think there's more to come. Buy.
Our view: Hold
Share price: (€20.24.+€1.10)
Paddy Power's numbers look pretty horrible on the face of it: operating profits are down a quarter to €34m (£30m), with the core Irish retail business seeing a 47 per cent fall to €11.7m. The obvious explanation is that this is one bookie that is a loser thanks to the Irish economy. But that's not the whole picture. Part of the reason given for the profit fall is unfavourable sporting results, which one always has to take with a pinch of salt. But, interestingly, the company is actually gaining market share in its heartland – the fall in profits is partly down to an increasing use of promotions and offers to keep punters happy and in the shops. It seems to be working. The amount customers staked actually increased. So the bookmaker should emerge from the recession in rude health.
Then there are the UK and online operations, where the growth will come from. As a relatively new entrant, albeit to a crowded market, Paddy Power can pick and choose where it opens. Its marketing continues to be sharp and successful. So while the results don't look good on the fact of it, they are actually rather positive. Of course, the shares are hardly cheap. They trade on 17 times Collins Stewart's forecast of next year's earnings, yielding 2.8 per cent. Paddy Power deserves a premium to the sector as a proven growth story and looks to be very well positioned. But at that sort of level, the shares are probably high enough. So we say, hold.
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