Investment Column: SAB's share price is looking a little frothy

Burberry; Cove Energy
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The Independent Online

Our view: Hold

Share price: 1996p (+86p)

Investors were raising a glass to SABMiller yesterday when the drinks group said that fourth-quarter sales jumped by 2 per cent, a rise that topped the market's forecasts. The maker of Peroni and Grolsch said an early Easter had helped trading, while volumes over the last 12 months were flat, in line with previous estimates.

The brewing industry has done no little whining over the last two years, blaming the bad weather, increased duty on beer and the smoking ban for an anaemic industry-wide performance. There are still elements that harp on about these ills, even now.

But SABMiller has had a good year, with its stock rising by an impressive 80 per cent. In trading terms, the coming year should also be bright for the emerging markets specialist. The weather augers are predicting a good summer, while the World Cup will have us toasting success on the pitch, or more likely perhaps, drowning our sorrows. Ever strengthening demand from places like China, Latin America and Eastern Europe should also help the group.

SAB put on a decent 4.5 per cent yesterday, but despite all the encouraging factors, we rather suspect that punters have missed the boat. According to UBS, the shares trade on a current year price-to-earnings ratio of 16.5 times, bang in line with the European beverages sector. UBS says buy, arguing that sales in the emerging markets will push the group ahead. We do not disagree, but the forecast 2010 dividend yield, at 2.4 per cent, is no better than adequate, and not big enough to counter what we think will be an inert share price. SABMiller is a decent company, and undoubtedly solid, but there is more fizz around elsewhere, so we'd just Hold for now.


Our view: Hold

Share price: 695.5p (-6p)

Burberry's shares closed down in what was a buoyant market yesterday. That was despite the high-end retailer saying that full-year profits were on track to slightly exceed market hopes. So, what happened? Was there some devil lurking in the detail? We think not. Traders simply took profits as the session came to a close. Burberry was pegged to impress, and it did, and some of those who'd piled in hopes of short-term gains duly filed out. The share price chart is telling in this regard – Burberry went from under 600p in early February to above 740p near the end of March.

The question for those still holding the shares, then, is whether or not Burberry's valuation leaves any scope for short- to medium-term gains. The long-term case seems intact. Management has revitalised the brand in recent years and the company is putting in the foundations for future growth by moving in to markets such as South America and India. But, as the analysts at Investec point out, the stock trades at a premium to its luxury goods peers and at the upper end of its own historic range on price-to-earnings multiples.

Indeed, on the broker's figures, Burberry trades on a multiple of 21.2 times earnings estimates for 2010. That does fall to 18.4 on the numbers for 2011, but, given recent strength, we think investors should exercise some caution. Again, this is not about the company – there are no grounds to justify a sell rating, in our view. But given recent gains, we would hold for now, though we would wade in on any weakness.

Cove Energy

Our view: Buy

Share price: 49p (-6p)

Cove Energy's shares dropped by 11 per cent yesterday on news that it had ceased drilling at its second "Collier 1" well because of safety concerns. We say: even more reason to buy.

Cash shell Lapp Plats was reborn as Cove Energy last year thanks to former Dana exploration director John Craven and former Shell Algeria chairman Michael Blaha. The plan was to mop up distressed companies' assets, and within months, the newly formed Cove did a deal with Norway's Artumas for interests in Tanzania and Mozambique. It then put together a five-well drilling campaign with operator Anadarko Petroleum for offshore Mozambique, with £40m from an equity placing. In February, Cove went from a good idea to an explorer that stands out from the crowd when its first well, Windjammer, uncovered a significant gas column – sending the stock soaring from 23.5p to 43.5p in just four days.

Optimism is still running high. While Collier is suspended, the remaining three wells will go ahead. And if there is time at the end of the programme, Collier will be revisited. Either way, we are sufficiently impressed with Cove's swift progress and early success that Collier is of little concern. For investors interested in explorers, Cove has an unusual combination of cash, assets and promise. Buy it while it's cheap.