Investment Column: Investors should back ENRC's M&A plan

Mitchells & Butlers; Bellway
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Our view: Buy

Share price: 1201p (+7p)

Even as recently as six months ago, if a company told the world that it was planning to take on more debt, alarm bells would have started ringing, panic would have spread and the rats would have jumped ship.

Thankfully, times have moved on. The FTSE 100-listed Kazakhstan-based miner, Eurasian Natural Resources Corp, yesterday said that it was looking to leverage its balance sheet to as much as two times earnings to fund acquisitions. With commodity prices generally moving north, and strong structural demand from places like next-door neighbour China, we think the move is a sound one that will lead to growth for shareholders.

The announcement came as the group, which is the world's biggest ferrochrome producer, announced a 61 per cent drop in annual earnings. That looks like a big fall, but we wouldn't be too concerned. The fall in earnings was largely caused by plummeting commodity prices last year.

As prices have steadily recovered, so ENRC's share price has surged: in the last year the stock has put on an impressive 175.45 per cent. The dividend yield of nearly 1.5 per cent is anaemic, but it is better than nothing, which is what a lot of the mining groups offer.

There are risks, of course, and ENRC's behaviour is somewhat questionable – last year it refused to comment on statements by African Minerals that ENRC was about to buy the company. Investors want certainty and ENRC needs to learn to be more transparent and open with them.

Nonetheless we are backers of the company. The group is in the right markets and is looking to ramp up production, while the demand for its produce is high. Trading on a multiple of more than 20 times 2010 forecast earnings means that the shares are not cheap, but we would still back the stock to continue to grow. Buy.



Mitchells & Butlers

Our view: Hold

Share price: 302p (+10.9p)

Around the turn of the year, Mitchells & Butlers became embroiled in a public slanging match between its biggest shareholders and former chairman that would have done the cast of the BBC's EastEnders proud. The pub and restaurant group's new chairman, John Lovering, unveiled his 60-day review yesterday in a far more orderly fashion. And it was toasted by the market, with the shares finishing up despite the Chancellor unveiling more tax misery for the industry.

The new strategy is for M&B to focus on outlets that rely on food. The group's expansion will centre on six core brands, including Harvester, Toby Carvery and Sizzling Pub Co.

More specifically, M&B, which has a total of 1,948 sites, wants to open smaller format Harvester and Toby Carvery outlets in locations that generate high footfall, such as retail parks. It also plans to improve margins and trim its chunky debt. Partly by consolidating costs in its food supply chain, M&B estimates that it can add about £30m by reversing the gross margin erosion it has suffered over the last three years. The shares are fairly valued at 12 times forecast 2010 earnings, a discount to certain rivals. Still, we have concerns over the anaemic recovery in consumer spending and, despite the pub group's new-found serenity in the boardroom, believe next year will be a better time for investors to raise their glass. So hold.



Bellway

Our view: Hold

Share price: 760p (+40.5p)

Some upbeat numbers from Bellway, which has turned a £48.6m loss into a £19m profit for the year ending 31 January 2010. Britain's fourth biggest housebuilder is not exactly radiating optimism about the housing market – and nor should it be, given recent figures on prices and mortgage approvals suggesting that the recent mini-recovery could be coming to an end. But, on the other hand the dividend – which was commendably paid throughout the worst of the downturn, has been raised 10 per cent, which is a sign of confidence. Bellway has also raised its expectations for home sales this year (to 4,600) and said it expects to step up land buys (it has a cash pile of £72m).

The stamp duty cut should give a further boost to the shares (although the company would rather have seen stimulus measures targeted specifically at first-time buyers).

All this taken together and Bellway looks to be nicely positioned, even if the environment remains uncertain. The shares enjoy a fancy multiple (37 times next year's earnings) but against a net asset value per share of 842p, they are not as pricey as they look. We said "hold" at 526p when we last looked at Bellway, in December 2008. Given the uncertainties, we would be reluctant to buy more, but Bellway is in decent shape and we think that the shares should reward investors who continue to hold them.

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