Investment Column: Stars are aligning for Babcock's shares

Randgold Resources; Tottenham Hotspur
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The Independent Online

Our view: Buy

Share price: 619.5p (-22.5p)

There was some unhappy news for Babcock International last month when Network Rail told the engineering outsourcing company that it would not be renewing its railways contract.

For investors, it was nothing more than a mild irritation and had no affect on the impressive charge of the shares. The stock has put on more than 66 per cent in the past 12 months as investors gravitated towards its heavy public sector offering, while the rail mishap has been compensated for by renewed focus on other sectors: back in September the Government sold its commercial nuclear business, UK Atomic Energy, to Babcock and yesterday the company said it would look to expand in the nuclear and defence sectors, where it says margins are higher.

As part of the first-half report, the group said it would look at the future of its rail business, which could lead to a sale, as well as detailing that interim profits had hit £66.1m as expected.

A risk facing every company that relies on public-sector projects is that the Government, whether Labour, Conservative or other, will cut back on spending as a result of the gaping hole in the public finances. Babcock's chief executive Peter Rogers rightly points out, however, that because it is an engineering specialist any cuts may prove to be advantageous. "On the whole, older assets need more maintenance," he argues. We concur.

For that reason, we rather like Babcock, especially with the shares being cheap, according to analysts. "Babcock's share price is up 38.5 per cent over three months, outperforming the FTSE All-Share [up 10.5 per cent]," say the watchers at Arbuthnot. "Furthermore, the shares still trade at some discount to peers, with a March 2010 price-earning ratio of 13.6 times, versus our outsource peer group 16.1 times and VT Group at 14.4 times.

"Babcock's continued steady double-digit growth gives us confidence to lift our target price to 720p, which would equate to a 2010 price-earnings ratio of 15.2 times." We see no reason not to buy the shares. Buy.

Randgold Resources

Our view: Buy

Share price: 4577p (-202p)

As most things have crashed down around the feet of investors in the past year, so gold has enjoyed a revival as investors flocked to safer ground. As such, Randgold Resources, possibly the biggest company you might never have heard of, has cashed in.

The mining group is the only pure gold miner on the FTSE 100 and, with the price of gold shooting through the $1,000 per ounce barrier over the past few months, so its shares have soared – up 144 per cent in the past year. However, yesterday's third-quarter results from Randgold were less impressive. While production was up, the profits missed expectations after its costs per ounce of gold mined rose to $573, largely because of higher charges at its Loulo project in Mali.

As a result of the charge of the stock, Randgold is pricey but still worthwhile, says JP Morgan. "In our view, the honeymoon may only just be beginning," JP's analysts said in a note. "By using conventional DCF-based and most other valuation measures, the shares cannot be described as cheap because it is always hard to value 'what you can't see'. For us, Randgold epitomises a golden 'iceberg' ; the biggest part of it remains yet to be discovered, below the surface. Good things are rarely cheap. We stay steadfastly overweight."

It certainly isn't cheap, but we think there is still value in Randgold. Buy.

Tottenham Hotspur

Our view: Hold

Share price: 76p (+1.75p)

Glory, glory Tottenham Hotspur, is what they sing on the terraces of the football club's White Heart Lane ground. Yesterday, however, it was the club's investors, not the fans, who were singing the praises of Spurs after it reported a record full-year, pre-tax profit of £33.4m.

Football clubs have never been the happiest of investments for the dispassionate; Newcastle United's now want-to-stay owner, Mike Ashley, could tell you a thing or to about that.

For an investor, however, Spurs has some attractive features. The team is likely to be vying for a hugely lucrative Champions League place next season, which in turn, will help it tie down evermore lucrative sponsorship deals.

The numbers look good too. According to Reuters data, the shares trade on an undemanding price-earnings ratio of 2.4 times, while the dividend yield is very healthy 6 per cent.

The downside is equally clear, though. The club's good start to its Premier League campaign may falter, and the Champions League slot may go elsewhere: there is, after all, plenty of fearsome competition. The numbers yesterday were also boosted by player sales, which of course can impair performance. We would hold and wait to see how Spurs' season pans out. Hold.

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