Investment Column: Not the time to take a shine to Emerald

Clarkson; Aero Inventory
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The Independent Online

Our view: Hold

Share price: 410p (+13p)

Analysts yesterday pointed to Emerald Energy reporting that it had received a higher-than-expected tax charge from the Syrian government. The charge meant that 2008 earnings per share were up only 520 per cent. At the same time, profits grew by just 600 per cent.

The above, clearly in jest, should not detract from the fact that Emerald Energy, the FTSE 250-listed oil exploration and production group, has had a stunning year, and is one of the best performers on the LSE. The shares are up 50 per cent in the last year, and, even though the company opts not to pay a dividend, the performance of the stock alone justifies holding it.

So a buy, then? Experts at the house broker, Evolution, would certainly think so, arguing that "with no funding concerns, the company looks undervalued with core net asset value, at $50 a barrel, [at a] long term of 469p (almost 20 per cent upside)". The watchers argue that taking account of risked discoveries and the group's exploration portfolio, the shares could reach as high as 800p. Buyers were certainly heeding the advice yesterday as the price rose by 3.8 per cent.

Exploration groups are always a risky punt, however, and Emerald, which operates in Colombia and Syria, said yesterday that a faltering world economy would mean that it faces uncertainty as demand for oil falls.

The group, like most others, claims to be "well positioned", and with its activities fully funded, investors are insulated from the worst of the economic mire. The company may well prove us wrong, but we think that Emerald will have a tougher 2009, which would certainly be reflected in the share price. As such, we would adopt a wait-and-see policy. Hold.


Our view: Hold

Share price: 515.5p (-4.5p)

If investors have one golden rule about buying shares in a downturn, it should be to avoid those in sectors that are going to find the going tough in 2009.

The shipping services group Clarkson is one such group. Despite having to settle a lawsuit, 2008 was a decent year for the company, with pre-tax profits before exceptions up £7.6m, from £31.6 in 2007. Add to that the group earns revenues in dollars and the fact that the order book is good, and you might think that Clarkson is worth backing, especially as the shares are up 62 per cent in the last quarter. Analysts at Daniel Stewart say that "the underlying valuation of Clarkson is very low, and we retain our buy recommendation. Our target price is 700p".

We would be in agreement if it were not for yesterday's statement being cautionary about 2009 and that the start of this year has been tough: "trading conditions in some shipping markets have led to significant declines in revenue from these parts of the group since the beginning of 2009," for example.

As such we would wait a little longer to see how the rest of the year pans out before buying, even if the group argues it is still resilient. Hold.

Aero Inventory

Our view: Sell

Share price: 170p (-35p)

There is no doubt that investors are not too keen on the investment case for Aero Inventory, the group that provides the aviation industry with inventory software. In spite of some cracking numbers in the last year, and especially yesterday when the group announced its interim results, the shares have dropped by two-thirds in 12 months.

The reason, says the chief executive, Rupert Lewin, is that buyers do not like the fact that the group needs to put much of its cash into inventory that it might ultimately not need. The shares were down a further 17.1 per cent yesterday on news that the group has missed out on what would have been a major contract with a new airline client, despite first-half revenue being up 55 per cent, pre-tax profits by 54 per cent and EPS up 47 per cent. The spin was that in fact the loss of the contract means that the all-important cash will not need to be tied up in a new contract, and hey presto, the share price will rise. Mr Lewin has a point, and investors will also be encouraged to know that the stock is cheap against its peers.

Cautious as we are in these tough times, however, we would question the wisdom of investing in a company that relies so heavily on the airline industry. Mr Lewin makes the thankfully correct argument that aeroplanes need to be maintained regardless of the economic situation, and that tougher times for the airlines means fewer new planes and more maintenance for their older ones. True, but it also means fewer flights.

We think Aero is a good company and the shares have the potential to grow further, but we are wary about anything related to the airline industry, which judging by results is going through a very tough time. Sadly, now is not the time to own Aero stock. Sell.