Investment Column: Nighthawk will emerge from the pack
United Drug; Shepherd Neame
Thursday 08 October 2009
Our view: Buy
Share price: 37.25p (+1.75p)
Nighthawk Energy could turn out to be a great punt for investors.
Unlike most Aim-listed oil and gas exploration groups, Nighthawk is a producer of the black stuff, giving it revenues it can then plough back into the company to develop new sites.
Another advantage the company can claim over many of its rivals is its operations in the United States, which clearly gives it the benefit of operating somewhere that is not going to remove its licence at a whim or descend into civil war without warning. The company's most promising asset, its 50 per cent stake in the so-called Jolly Ranch project in Colorado could produce as much as 1.5 billion barrels, according independent consultants.
That is the good news, but as any investor worth his salt knows, oil and gas exploration companies are always a risky punt at best, and a hopeless shot in the dark at worst. Nighthawk is at the better end of that analysis, but those investors wanting to back big, blue-chip and stable, should probably give the group a wide berth.
Nighthawk's full year numbers, published yesterday, detailed an operating loss of $2m (£1.25m), which follows a drop of nearly 30 per cent in the share price over of the past 12 months. As with the majority of similar companies, the prospect of a dividend lies buried deep beneath the Colorado desert.
However, the numbers were actually pretty good. The group's operating loss narrowed by 42 per cent on this time last year, while revenues of a nudge shy of $500,000 were well up on 12 months ago. The group even managed to raise $37m in a placing in August and is rightly using the money to drill more wells and drive all important production. According to watchers at Hanson Westhouse, the shares are "significantly undervalued by the market as demonstrated by our valuation of Nighthawk at 225p per fully diluted share". Buy.
Our view: Hold
Share price: 228c (-4c)
We would not be overly concerned about yesterday's full year profit warning from Irish healthcare group United Drug.
The company said that because of the falls in the valuations of sterling, its overall annual profits would be below expectations, although on a constant currency basis, they would be ahead of forecasts.
The fact that buoyant trading in some areas of the business is offsetting those parts of United that are struggling also doesn't worry us, and nor does the fact that the shares traded down yesterday, by 1.7 per cent.
In fact we are rather encouraged by Davy Stockbrokers' argument that, trading on a price earnings ratio of 12.7 times, and with a dividend yield of 3.5 per cent, the stock looks undervalued: "Now that United Drug has broken out of the 190-220c trading range of early summer, further re-rating can be achieved as a return to growth is realised in 2010-11. The current rating and yield are attractive in this context."
What worries us more is that during the great financial mess of 2008 and 2009, the pharma companies generally outperformed the market, with share prices remaining steadier than other more cyclical stocks. This has not been the case with United Drug, which has seen its share price rise by 40 per cent in the past six months, but trade down by 40 per cent over the past year. As such, those liking pharma should back some of the bigger, more stable groups like GlaxoSmithKline or Astrazeneca.
However, for the general investor, we reckon that, even despite sterling rather ruining the numbers, United Drug's share price should continue to grow and we would hold on until the stock shows signs that it is beginning to falter. Hold.
Our view: Buy
Share price: 822.5p (unchanged)
Given it was founded in 1698 in Faversham, Kent, the pub company and brewer Shepherd Neame has come through the odd recession or two.
And yesterday, Shepherd Neame showed it will emerge from the latest downturn in a sound condition. Granted, its pre-tax profits for the year to 27 June fell by 21 per cent to £6.9m, largely resulting from a spike in raw materials, costs from outsourcing bottling work and a weak performance in the bottom 10 per cent of its tenanted pubs. But there was still much to toast in the numbers.
Sheps grew total sales by 7.6 per cent over the year, driven by a 29 per cent surge in total bottled sales, such as its Spitfire and Bishops Finger premium ales. The company's total beer volumes were up by 10.1 per cent in the first quarter to 26 September.
Shepherd Neame operates in a tough sector facing long-term challenges, particularly in the on-trade industry, but the company looks well-placed to benefit from any sustained recovery in consumer spend. It will be around for a long time yet. Buy.
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