Investment Column: Payout shows Antofagasta's confidence
Wednesday 09 March 2011
Our view: Hold
Share price: 1,382p (-38p)
Copper, as we have noted before, is the key to deciding whether or not to invest in Antofagasta.
This is not to downplay the importance of the company's strengths and weaknesses; they still matter. But the copper miner's shares are, along with sector peer Kazakhmys, among the most geared to commodity markets.
Turning first to the business itself, the full-year figures published yesterday were strong. Revenues rose by a heady 54.5 per cent to $4.6bn on higher copper prices and good production, but best of all for investors Anto-fagasta said it would pay a final dividend of 112 cents, made up of an ordinary payout of 16 cents, up from 9.4 cents last year, and a stonking special dividend of 100 cents per share, up from 14 cents last year.
Driving the company's confidence, in our view, are the underlying fundamentals of the copper market, with the prospect of a yawning mismatch between demand and supply looming on the horizon for 2011.
The problem for us is that the industrial metal has already been on quite a rally, with average prices on the London Metal Exchange up 46 per cent last year. That may open the door to some profit-taking, we fear. Moreover, there is a question of rising costs as energy prices pick up. So far, that has not mattered as the impact has been offset by rising commodity prices. But a sharp pull-back in the copper price may change that.
Of course, these concerns – all of them short to medium term in nature – can be offset by the valuation. But, alas, Antofagasta already trades at "considerably higher multiples than those of Kazakhmys or indeed the major diversified miners", according to the scribblers at Evolution. Given that, we would not buy. But the company's strengths and the confidence evidenced by the special dividend means this is not a sell.
Our view: Buy
Share price: 1,695p (-84p)
Weir's shares were out of favour last night, despite thoroughly respectable results showing orders surging by 39 per cent to £1.9bn last year.
The company also posted pre-tax profits up by more than 60 per cent, on revenues of £1.6bn. And yet, the stock slumped in afternoon trading, in part on unexpectedly high debts, but also as investors took profits from an eight-month run of gains.
But the engineering group remains attractive, in our view. Of its three divisions, oil and gas was the stellar performer last year. Order input for the year almost doubled to £626m, thanks to the recovery in the US shale market, sending profits soaring by 122 per cent to £117m.
Roaring demand for commodities also played well, pushing the minerals division's orders up by more than a quarter to £984m. The only slight drag was the power and industrial unit, as weakness in developed markets outweighed strong activity in Asia.
Keith Cochrane, the Weir Group chief executive, said the company had demonstrated "great agility" in improving mining and oil and gas markets in 2010, and said it is "well on track" to double 2009 profits by 2014, as planned.
In the short term, Weir has a strong order book and a clear growth strategy. Over the longer term, its exposure to growth markets such as mining and oil and gas give it plenty of potential.
Our view: Hold
Share price: 393.6p (+2.1p)
Inchcape became the latest UK-based car dealership operator to wheel out an impressive set of figures yesterday, following on from rivals Vertu Motors and Pendragon over the past fortnight.
A rigorous focus on costs – mostly notably, a reduction in headcount and disposal of 15 sites – and a robust performance in most of its 26 markets helped Inchcape accelerate profit growth by 38 per cent to £214m for the 12 months to December.
More good news for investors came from Inchcape recommending a final dividend of 6.6p, after passing on its final payment for 2008 and 2009.
For all the good news, Inchcape, which sells brands from Mercedes-Benz to Porsche, warned of an "uneven global recovery".
The company forecasts market growth in Australia, Russia, South America, Ethiopia, and the Baltics, but "declines" in Singapore, the UK, Belgium and Greece, which together account for more than half of group sales. Inchcape's caution makes us wary of wading in, but the fact that the stock trades on a modest forward earnings multiple of 11.6 argues against a negative view.
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