Investment Column: Oil finds back investment case for Tullow

Ark Therapeutics; Chime Communications
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The Independent Online

Our view: Buy

Share price: 758p (-54.5p)

Everyone knows that, despite the Government's best efforts, getting the banks to lend is like pulling teeth. Investors should sit up and take notice, therefore, when the likes of Royal Bank of Scotland, Barclays and Lloyds, among others, club together to arrange a new $2bn (£1.5bn) debt facility.

The grateful recipient is the FTSE 100-listed exploration and production company Tullow Oil, and looking at yesterday's results, it is easy to see why the bankers are happy to part with your cash. Pre-tax profits were up £110m and, to cap it all, the group has made "a major new discovery" of the black stuff at its fields in Uganda.

As the price of oil has fallen from its highs of $147 a barrel last July, Tullow's shares have risen. The group's stock price is up 64 per cent in the last quarter alone, which is all the more remarkable given that the company raised £402m from investors in a share placing in January. The fact that the debt financing is now in place also indicates that the group has sufficient cash to get its blue ribbon Jubilee project in Ghana off the ground.

Buyers would not be getting a cheap stock with Tullow Oil, and the group admits that the shares look expensive when compared with others in the sector. We would still be buyers given the confidence the market has in Tullow and its track record in finding oil. Analysts at Merrill Lynch argue indeed that the shares are good value trading "at a compelling discount to net asset value", making the company a "core holding in the E&P universe". We might not put it quite in those terms, but we agree with the sentiment. Buy.

Ark Therapeutics

Our view: Hold

Share price: 44p (-1.75p)

In one respect, investors would be mad to put their money into biotechnology companies. Almost all have lost value in the last year and with most merrily splashing the cash on research and development, which is necessary but seldom profitable, the prospect of dividends is limited.

At first glance the gene-based treatment group Ark Therapeutics is little different. The group said yesterday that it had recorded a sizeable loss, and there is nothing like the sniff of a dividend. Also much like others, it claims it is in a better position than most.

The chief executive, Nigel Parker, says that the stock's 39 per cent fall in the past year is due to wider market nervousness, and with £40m of net cash that takes Ark to the end of next year at least, the shares are undervalued.

Most of the analyst reaction yesterday was favourable, and with trials expected to start on what Mr Parker describes as a potential blockbuster drug, Trinam, which is designed to help those suffering from blocked veins and arteries, in the next year, the future could be rosy.

Biotech stocks tend to move on news, and investors are expecting an update soon on whether the group's brain cancer treatment, Cerepro, will get approval from European regulators. Watchers at KBC say that information is scant and that investors should sell. Mr Parker says that there is nothing to update, and moreover, nothing to worry about.

There will be a problem if the European approval is not forthcoming, and should the worst happen, recent share price gains will be lost. For that reason we would hold fire. Hold.

Chime Communications

Our view: Hold

Share price: 67p (+3.5p)

Like all others, public relations firms are suffering in the recession, despite the spinsters arguing that companies still need to get messages out.

At least Lord Bell, the chairman of Chime Communications, is honest enough to say that despite running one of the biggest PR groups, the recession is likely to hit his business at some point this year, even if there is little evidence of it yet.

Investors should take note, and although the shares were up yesterday on the back of impressive full-year results, which said that operating profits were up 15 per cent, we would be cautious about buying into a sector hit by clients cutting costs.

Watchers at KBC have the group on a buy, however, saying "on our forecast earnings of 18.3p... the stock trades on 3.5 times, which is in our view undemanding. Our target price of 80p would imply a still cautious 4.4 times".

Lord Bell says that once the economy improves, investors will be in clover. We do not disagree, but think it could be a while away. Hold.