Investment Column: Market worries temper the BHP case
Sports Direct International; Fidessa
Thursday 21 April 2011
Our view: Hold
Share price: 2,534p (+63p)
So far, we have been pretty bullish on the big diversified mining groups. BHP Billiton in particular has stood out, boasting not just an enviable exposure to key commodities such as iron ore and coal, but also one of the strongest balance sheets in the sector.
To be sure, the miner remains very strong. Yesterday's production update showed that its iron ore business, though hit by the flooding in Western Australia earlier this year, remains on track to book a record annual performance. On the downside, the outlook for the coal business was tempered by persistent rains down under.
But before the bears start celebrating, we would highlight that the rains will eventually clear and the business will recover in due course. Given the attractive fundamentals of the international coal market, it is a question of when, not if. And when things do get better, BHP, which is investing billions in its operations, will be in a good position to reap big gains.
That said, we are concerned about the commodities market as a whole. The recent surge suggests that the market will have peaked, with Goldman Sachs – one of Wall Street's best-known commodity bulls – recently telling its clients to exercise caution. We agree. The low interest-rate environment that has aided the price of key metals is being increasingly questioned as policymakers attempt to rein in rising consumer prices around the world.
All this makes us cautious. But again, BHP's balance sheet, and its still-affordable valuation of under 11 times forward earnings, argues against a "sell" stance. The investment programme only adds to the attraction, as it prepares the company for the longer term. However, our concerns about the commodities market in general tempers our enthusiasm and for now makes us wary of pressing the "buy" button again.
Sports Direct International
Our view: Buy
Share price: 198.9p (+2.9p)
Mike Ashley's Sports Direct has never been far from controversy – but this time, there is nothing to worry about.
It was able to calm nerves after the Fair Trade Commission raided Adidas in Japan, alleging the footwear firm has enlisted retailers in dodgy practices to hurt sales of rival Reebok EasyTone shoes in the country.
Sports Direct was able to say that Adidas had not supplied it with these Reebok trainers and if such an issue arose in the UK then Sports Direct would "not face any risk of sanction" – a statement that helped to propel Sports Direct's shares to their highest since June 2007.
From an investment perspective, we remain fans of the company, and we're hopeful of another good trading update today. For a start, Sports Direct is the dominant player in the market for affordable sportswear, not least because rival JJB Sports has been struggling for a number of years.
The retailer has improved profits and sales sharply for the past three years, and has plenty of growth ahead of it in Europe – not to mention the boost from the London Olympics and European Championship football.
Moreover, despite its recent surge, the stock trades on an undemanding forward earnings multiple of 11.5. With the prospect of its dividend returning in its 2011-12 financial year, we're happy to keep backing this horse.
Our view: Buy
Share price: 1,770p (+32p)
Fidessa's trading update yesterday was steady as she goes. In a statement short of numbers, the trading platform supplier and consultancy said it was winning "significant new orders" despite the regulatory and economic uncertainty hanging over its financial-institution customers.
The company is a technology favourite because of its strong cash flow, recurring revenues, prudent management and leading position in a market expanding in fast-growing economies. The threat of regulation has dampened demand for Fidessa's services as banks have held off on big projects. But its low-key chief executive, Chris Aspinwall, says that once the picture clears, regulation will be a "tail wind" as large customers upgrade their systems.
Cautious investors will point out that the stock trades at a premium: 24 times Numis's 2011 forecast earnings versus 16 times for the wider software sector. But we think the market is right to award Fidessa's cash generation (with regular special dividends), growth prospects, lack of debt, and restraint on acquisitions.
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