Investment Column: Petra Diamonds is a sparkling investment

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The Independent Online

Petra Diamonds

Our view: Buy

Share price: 59.75p (+2p)

One big diamond does not a mining company make. However, Petra Diamonds, the Aim-listed mining group, is expected to sell its 507-carat white diamond, the Cullinan Heritage, later this week, and yesterday said that the rock, one of the biggest ever discovered, is attracting more interest than initially expected.

Analysts at the house broker, RBC Capital Markets, reckon that it will fetch between $15m and $20m. Sources close to the company describe the guesses as "conservative".

But investors should not be blinded by the undoubted allure of the headline-grabbing bling. Much more important, in our view, is the company's belief that the second half of its year will be better than the first on account of rising diamond prices. Yesterday, Petra said profits of $37.9m in the first half were on expectations (and much better than last year's first-half loss of $88m), while Ebitda was ahead of estimates. If the fragile economic recovery continues, the finance director, David Abery, says the company is confident.

Mr Abery is backed by its house brokers, RBC and Canaccord Adams, but those at Ambrian point out that "these results were a mixed bag. Overall we think the amount of profit that relates to the single stone will hold back the market from re-rating the shares more than a few pennies ... However, the longer-term prospects are looking excellent."

Petra says it owns assets capable of producing 3.5m carats a year, up from its current 1.2 million, while a $120m rights issue last year has put the balance sheet in better order.

We reckon that punters can expect the news on Friday to ratchet up the share price, adding to the near 100 per cent improvement over the last 12 months. Petra is a proxy for the diamond market, so if investors are confident that the price of rocks is on the up, and we are, then you're probably best off buying Petra. Profitability has not yet turned into a dividend, although in Petra's case growth is still key for the group. We would be content with the expected rise of the stock. Buy.

Albemarle & Bond

Our view: Buy

Share price: 275p (+3p)

The recession has led to a gold rush on the high street, as hard-up consumers sell their unwanted gold jewellery for cash.

This trend has played into the hands of the pawnbroker Albemarle & Bond, which wisely launched an "old gold buying" service last year. Yesterday, the 123-store high street operator said that gold purchasing had contributed £5.2m in gross profit over the six months to 31 December, although the recent rise in gold prices has taken the shine off its retail sales, which fell by 5 per cent.

Nevertheless, this was the only blip in a set of sparkling results at A&B. The pawnbroker's half-year pre-tax profits surged by 75 per cent to £10.8m, on total turnover up by 49 per cent to £39.4m. Driving this growth was a 7 per cent jump in its pawn loan book to £27.5m, the outstanding amount loaned to people against collateral. Another attractive nugget for investors was a 22 per cent hike in its interim dividend to 2.75p. Despite its strong recent performance, its shares also only trade on a forward 2010 price to earnings ratio of 11, a small discount to the wider retail sector.

There are reasons to be cautious, however. A&B said it expects the tough economic conditions to continue, weighing on its retail business, and that the gold purchasing market will reach maturity. But irrespective of whether the surge in consumers selling their gold continues or not, A&B has a shining track record of delivering. Buy.

Skywest Airlines

Our view: Buy

Share price: 14.11p (+1.61p)

The airlines are in trouble – or so we are told. A cursory survey of headlines would lead you to think that the entire industry, bar none, had flown into the deepest, darkest, most turbulent stormclouds imaginable.

And yet, we can't help but recommend Skywest Airlines, the Aim-listed carrier, which yesterday posted a 10 per cent hike in first-half revenues.

The company has struck gold by ferrying miners in Western Australia. The region hosts commodity heavies such as Rio Tinto and BHP Billiton among others, and Skywest has been cashing in by flying their employees in and out of the mining areas. Yesterday, the airline said it was "tendering for various charter contracts", raising the prospect of higher recurring revenues in the future.

The investment case is supported by a 3.9 per cent yield and a stock trading on an undemanding multiple of 4.3 times WH Ireland's full-year estimates. That falls to 2.8 times on the broker's numbers for 2011. Buy.