Investment Column: Hold solid Derwent until the price drops

Hikma Pharmaceuticals; Avocet Mining
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The Independent Online

Our view: Hold

Share price: 1330p (-8p)

The recovery in London's residential property market has recently outstripped the rest of the country, and the capital's commercial market seems to be progressing in a similar vein.

Yesterday, Derwent London, the FTSE 250 real estate investment trust (Reit), vowed to tap into this momentum and accelerate its investment in existing and new schemes, alongside a resilient set of full-year results.

The company, which specialises in renting out office space to clients in central London, said it continued to regenerate and refurbish its existing properties and, where possible, "accelerate schemes".

There were plenty of other positive nuggets in Derwent's 2009, which was largely a year of two halves as the economy slowly emerged out of recession. Overall, Derwent, whose most famous building is arguably Burberry's headquarters in London, posted a vastly improved annual loss of £34.9m for the 12 months to 31 December 2009, compared with a whopping deficit of £606.5m the year before.

It also touted more than 100 new lettings, including a deal with the energy giant EDF, and said that rental incomes and the valuation of its portfolio were heading in the right direction. At a balance sheet level, Derwent – which avoided a cash call last year – also boasted a reduction in its loan-to-value ratio to 36.4 per cent, an improvement of more than 3 per cent.

More importantly for investors, Derwent hiked its final dividend by 15.3 per cent to 18.85p, giving a total payment of 27p, up 10.2 per cent.

However, the Reit's share price closed yesterday at a slight premium to some City 2010 forecasts for its adjusted net asset value of 1,313p, making it more expensive than rival Shaftesbury.

Given the rally in Derwent's shares over the past year, we believe that investors should pile back into this well-run company when the shares hit a more enticing valuation. Hold.

Hikma Pharmaceuticals

Our view: Buy

Share price: 580p (-15p)

Investors often rant on about wanting to diversify their portfolios, so many could do worse than to throw their weight behind FTSE 250 listed Hikma, the Jordanian pharmaceuticals group.

The group, which has managed to keep an extremely low profile, operates its mainstay branded pharmaceuticals business in the Middle East and Africa, and while it has been hit by a strengthening dollar against the likes of the Sudanese pound, the group was still able to announce a 18.7 per cent increase in 2009 gross profit yesterday.

The chief executive, Said Darwazah, said yesterday that Hikma will continue to double in size every four years, and that more acquisitions are on the way, with the company managing to rack up a $400m war chest, including debt. While most of the pharma big boys have struggled over the last year, Hikma's stock has climbed by more than 50 per cent. Mr Darwazah insists, however, that the shares are undervalued.

Hikma's stock trades at 16 times earnings, according to analysts at Bank of America Merrill Lynch, which, they say, is a "slight" premium to its peer group. Growth prospects, they say, justify the price target of 615p.

We would back Hikma too. There is nothing to indicate that growth in its key markets will slow, and we would expect the shares to move on from here. Buy.

Avocet Mining

Our view: Buy

Share price: 105p (-5.5p)

In isolation, preliminary figures from Avocet Mining look anything but inspiring. Impairment charges and higher output costs pushed the gold producer to a pre-tax loss in the nine months to the end of the December. The numbers offset the impact of a positive outlook statement, and Avocet's shares ended about 5 per cent lower last night – unfairly, in our view.

The key takeaway for us wasn't the loss, but the news from the Inata mine in Burkina Faso, which ended up in Avocet's fold after it bought Wega Mining last year. Readers will recall that we recommended buying the stock when the acquisition was announced, pegging our hopes on Avocet's stewardship of the Inata resource. Yesterday's statement seemed to confirm just that.

As Ambrian points out, the ramp up there is running ahead of schedule, with commercial production well within sight.

Moreover, the valuation remains supportive, with the shares trading on a multiple of 9.7 times Evolution's forecasts for 2010. Put simply, we'd keep buying.

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