Investment Column: Lonmin looks cheap but needs to do more

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The Independent Online


Our view: Hold

Share price: 1782p (+97p)

Lonmin, the precious metals miner, presents investors with something of a dilemma. The group issued a decent set of first-half results yesterday, saying that it had moved back into profit, and sending the shares up by nearly 6 per cent. That's the good news. The not-so-good news is that Lonmin's stock has been left standing in the wake of other mining groups, which have benefited from surges in bulk commodity prices. Indeed, compared to some of its peers, Lonmin is looking decidedly laggard-like, with a rise of a little more than 13 per cent in the last 12 months. And the lack of a dividend does not provide any solace. But because the shares have not enjoyed such a bountiful time of late, Lonmin's stock is now looking attractive, trading on a 2011 price forecast multiple of 16.1 times.

There are other things to note. As well as reporting a profit yesterday, the group said that it is set to issue 9.6m new shares – about 5 per cent of the current issued share capital – to fund operations in South Africa under the country's black empowerment legislation.

On the dividend, the chief executive, Ian Farmer, said that while there was no interim payment, the company is "minded" to pay out at the end of the year. The speculative punter may also be tempted to have a bet on Lonmin given rival Xstrata's 24.6 per cent stake. Xstrata failed in a bid for Lonmin a little more than a year ago, but has benefited from the increase in commodity prices. It was also rebuffed in an approach for Anglo American last year, and is still sniffing around for deals. All that said, we still want more from Lonmin. The shares lag others in the sector, and while we see the improvement, it would take a return of the dividend before we buy, even though the shares are worth holding.

Braemar Shipping Services

Our view: buy

Share price: 426p (+4p)

After our last look at Braemar Shipping Services, events have turned out very much as planned. And in the six months following our "buy" recommendation, the share price has gained a healthy 9 per cent. Yesterday's full-year numbers might suggest a change of tack. Pre-tax profits came in at £15m, some way down on the previous year's £17.3m, pushing earnings per share from continuing operations down from 56.7p to 47.93p. The group's cash has also taken a hit, running at £15.3m rather than £21m in financial 2009. But there is still good reason to buy. In the short term, the good news is a final dividend up 5 per cent to 16.25p per share. There are also encouraging longer-term signs. Profits might be lower, but Braemar's numbers are still the third highest in the company's history, lagging only the boom years of 2007 and 2008. And demand in shipping is clearly recovering, after the decimation of the credit crunch and worldwide recession.

Braemar's chairman, Sir Graham Hearne, says he is positive about the company's prospects for the year ahead. We take a similar view of the group's shares. The stock is currently trading on a multiple of 7.7 times next year's forecast earnings, with a dividend yield of 6 per cent, according to Gerald Khoo at Arbuthnot, making it "attractive in absolute terms and relative to its main peer, Clarkson". There is some way to go before Braemar runs out of steam. Buy.


Our view: buy

Share price: 223.38p (+14.25p)

Interserve continues to please. The services, maintenance and building group yesterday said that its business is performing well, though, as flagged up at the time of the annual results, the support services and equipment services businesses continues to face challenges, "such that the second half weighting of profits will be more pronounced than usual". This no surprise, and as Panmure Gordon points out, should already be in the price. Now, as we've said before, investors in this sector must take note of the spectre of sharp cuts in public-sector spending. But as we've also noted in the past, Interserve isn't a one-trick pony. It offers non-UK exposure with its associate businesses in the Middle East, something which affords useful visibility in terms of future revenues.

Though a major selling point, what really seals the case for Interserve – and sealed it for us the last time the company was on our radar – is its valuation. The stock trades on a shockingly thin multiple of 5.3 times Panmure's estimates for the full year. Why? To be frank, we have no idea, particularly as Interserve offers a yield of well over 8 per cent. The credit crisis revealed that markets, though often ahead of events, don't always know everything. We continue to believe that Interserve is being unfairly overlooked. Keep buying.