Investment Column: Randgold deserves its premium, so buy

Ladbrokes; BBA Aviation
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The Independent Online

Our view: Buy

Share price: 5395p (-320p)

Trading on a hefty 22 times next year's earnings, the African gold miner Randgold Resources has always suffered from investors believing that it is too expensive. In fairness to them, that fancy multiple puts it at a premium to some of its rivals, and after yesterday reporting that cash costs (what it costs to dig out an ounce of gold) are at a high of $665, investors have a right to be nervous about the valuation.

But this only tells part of the story, says the chief executive, Mark Bristow. He says the analysts, who yesterday described the hike in costs as a "major negative" suffer from "quarteritis" and reckons that investors would be better advised to look at the bigger, and longer term, picture. Randgold reported a 20 per cent hike in year-on-year net income, with earnings per share being boosted by 100 per cent. Backers that got the heebie-jeebies after seeing the cost increases could try steeling their nerve by remembering the 45 per cent increase in the share price over the last 12 months.

Mr Bristow concedes that the shares carry a premium, but points out that the group's cashflow is strong, despite $120m of investment in the last year, and that there is enough in the bank to fund more expansion – Randgold is replacing its reserve, he adds, making it something of a rarity.

The group's stock price has fallen by 10 per cent in the last month, largely after the market anticipated today's announcement on costs. This, we believe, is reassuring, and after a further fall of around 5 per cent yesterday, the share price is now at a decent entry level, despite the premium.

Randgold will always have its detractors because of the shares' rating, but investors should not forget that the group is a proxy for the gold price and with the global economic outlook looking weak at best, gold will continue to be a commodity in high demand. If investors have yet to cotton on to the Randgold story, now is not a bad time to start. Buy.


Our view: Hold

Share price: 145.5p (+6.8p)

It was a great World Cup for Ladbrokes, but the horses were rather less favourable, taking some of the shine off Ladbrokes' results for the six months to 30 June. Royal Ascot was particularly disappointing (the bookie lost on 21 out of 30 races).

But that's par for the course for a gambling business. A more worrying trend was the 7.1 per cent drop in the value of over-the-counter bets at Laddies' 2,087 shops. Punters have been placing fewer bets (although the amount bet per slip actually increased). The fall contributed to operating profit at Ladbrokes' UK retail business slipping 6.3 per cent to £76.9m, despite growth in net revenue from its 8,000 gaming machines.

There were still bright spots in the results, however, notably a rise in earnings at the European retail business, eGaming and core telephone betting. The group also slashed debt to £503.7m at the period end, down from £694.2m on 31 December.

More importantly for investors, Ladbrokes has resumed paying dividends, with an interim payment of 3.85p. Cost cuts helped Ladbrokes to an overall 5.1 per cent rise in operating profits to £103.6m, excluding high rollers, which was ahead of expectations. Trading on 10 times 2011 forecast earnings, Ladbrokes looks more or less fairly priced, particularly given the uncertainty over how cutbacks will impact on the consumer's willingness to spend. So hold.

BBA Aviation

Our view: Hold

Share price: 201.6p (-1.4p)

BBA Aviation, which provides aircraft services such as engine repairs and maintenance, failed to make any headway after issuing its interim results yesterday. The stock was slightly lower, despite the company reporting a 17 hike in underlying pre-tax profits, returning to dividend growth and saying that it expected to make good progress over the year. Given the figures, we think the weakness was down to profit-taking, with BBA up strongly since the beginning of July.

BBA's results drew steam from improving trading conditions, and industry data points to even better times ahead. The fact that BBA's core businesses are US-focused argues for caution, as the world's largest economy is increasingly showing signs of a slowdown in the pace of growth.

That said, recent management action – BBA has implemented some significant cost reductions – leaves it well-placed to weather any wobbles over the remainder of the year. Its debt causes us some discomfort, but, against that, the stock is trading on undemanding multiples of less than 11 times forward earnings for 2011. That looks reasonable, so hold.