Investment Column: Investors should dig deep and buy Tullow

Carillion; Booker Group
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The Independent Online

Our view: Buy

Share price: 863.5p (-27p)

Analysts at Tullow Oil's broker, Merrill Lynch, argue that the company is the "core holding in the exploration and production universe". We would not disagree. The group is one the most impressive in the oil sector, which is otherwise dominated by a plethora of small-cap outfits whose business plans consist largley of raising as much as possible from investors and hope that a hole dug in some far-off land yields some of the black stuff.

Tullow is in a different class, largely because it has plenty of proven reserves at its various projects, especially its Jubilee operation in Ghana. And while the company yesterday put out disappointing estimates for the first half of the year – its revenues are expected to fall by 23 per cent – we reckon it is still worth a punt.

Yes, the volatile oil price does not help (and neither do rogue traders), but oil producers are facing tough comparisons after the price of crude climbed up to $147 in July. The market did not punish Tullow too severely yesterday, suggesting the falls in the oil price are already accounted for in the value of its shares.

The good news for those who do not yet hold the stock is that it still offers good value, despite climbing by nearly 20 per cent in the past six months.

Analysts at Charles Stanley say they would only hold the stock, but they do think there is some juice left in the share price. "In 2011, earnings per share should show a more meaningful increase as production increases but at this stage of its development Tullow and other small exploration and production companies are valued on a net asset value (NAV) basis," they said in a note yesterday.

"Currently, estimates of Tullow's core NAV are about 700p and potential appraisal and exploration activity could increase this to about 1200p. The current share price is at a 25 per cent discount to this valuation."

We reckon Tullow is a risky bet, which is not helped by volatile oil prices, but we do think the company offers enough for a speculative punt. Buy.


Our view: Buy

Share price: 252p (+3p)

Carillion is a very good example of why it is rather dangerous, particularly in these febrile markets, to keep all your eggs in one basket. The infrastructure and building group predicted in a half-year trading update yesterday that its earnings would be up, while full-year results for 2009 would be well ahead of last year. The good news sent its share price ticking up accordingly. The fact that 99 per cent of targeted revenues have already been identified should also encourage investors who rightly want to be betting on as safe a stock as possible in these unhappy times.

Carillion benefits from having its fingers in many pies. While it concedes that the British construction industry has remained slow for six months, the group's work in outsourcing, where it generates much of its revenue from government work and public-private partnerships, has been booming.

Carillion reckons it will continue to benefit from the long-term public sector contracts it has in place, despite expected future cuts in government spending to compensate for the cost of the banking bailout.

We have been fans of the outsourcing sector for some time. It may be because of Carillion's exposure to the construction industry that it is rated lower than others in the sector, but we would argue that trading on 6.5 times 2010 consensus earnings estimates, and yielding 5.6 per cent, the shares have room to improve. Buy.

Booker Group

Our view: Buy

Share price: 35p (+1.25p)

For an author, the Booker Prize is about as good an accolade as it gets. For an investor, its shares are not such a bad result either. Britain's largest cash-and-carry wholesaler, which supplies more than 250,000 catering businesses, grocers, pubs and restaurants, said yesterday that its first-quarter non-tobacco sales were up by 10.4 per cent – a better performance than it thought it would record when it updated the market two months ago.

Booker's chief executive Charles Wilson, like so many bosses, says he is "cautiously optimistic" about the rest of the year, hailing the good weather in the first three months as a reason for cheer. Shareholders have also enjoyed a great six months, with the share price up 50 per cent. Booker's stock has benefited from moving up to the main list at the start of this month, and should get another fillip when it moves to the FTSE250, probably in December.

We would buy now to make sure we are in before the shares attract some of the bigger institutions. The fact that analysts at Evolution say there is room for further growth in the price only strengthens the case. Buy.