Investment Column: The changes at Cairn need time to settle
Spectris; Promethean World
Wednesday 25 August 2010
Our view: Hold
Share price: 445.5p (-18.9p)
It's been a busy time for Cairn Energy. Yesterday's half-year financial results reported revenues booming by more than 300 per cent to $333m (£216m), thanks to its Rajasthan oilfields coming on stream, swinging the group to a $58.4m profit compared with last year's $118m loss. Production also saw a significant increase, up by 27 per cent to more than 87,500 barrels of oil equivalent per day.
The results came barely more than a week after the FTSE 100-listed oil and gas company announced the proposed sale of 51 per cent of its Indian operations to Vedanta for $8.5bn.
Now the focus is Greenland, the chief executive, Sir Bill Gammell, stressed yesterday. "In line with Cairn's long-held strategy of adding and realising value, the transaction with Vedanta will result in a substantial return of cash to shareholders whilst ensuring the company has the financial flexibility to pursue its multi-basin exploration strategy in Greenland," he said. Despite Cairn's confidence, the strike is far from the major find that some had hoped for. There are also difficulties arrayed against drilling in the region. Environmental groups have long fought against prospecting in the pristine Arctic, and regulatory conditions may also be trickier in the aftermath of BP's Deepwater Horizon oil spill in the Gulf of Mexico.
The good news is that each new well gives Cairn buckets of new data. The bad news is that it could take more time than the market can bear before any major strike. Analysts at Finncap said yesterday: "These results should hit home that it will take a long time to fully understand the [Greenland] basin and could take many years to make a commercial discovery if at all." Hold.
Our view: Hold
Share price: 869.5p (-41p)
The fact that Spectris's share price fell back, shedding more than 5 per cent of its value, after the electrical engineer issued half-year results yesterday, might suggest there was something ugly lurking in the release, but intra-day moves can be deceptive. To begin with, the figures were decidedly upbeat. Adjusted pre-tax profits were strong and the interim dividend was raised by a healthy 11 per cent to 7.1p per share.
Second, the shares are up strongly since the start of July, suggesting that the market was anticipating the good news and that confirmation simply sparked a round of profit-taking.
So, Spectris seems to have done well – so much so that we cannot justify a sell stance. The problem is that, looking ahead, economic prospects are getting grimmer by the day and, while part of Spectris's strength can be attributed to self-help measures instituted last year, it is clear that it benefited from improving cyclical trends in the first half of the year.
This suggests that the market may remain cautious about the company's shares until there is more clarity on the economic front. The valuation doesn't help either, with Spectris trading on a multiple of 12.1 times forecast earnings for 2011, against a sector weighted average of about 11.7 times, according to analysts at Jefferies. Hold.
Our view: Buy
Share price: 119p (-29.5p)
Since time immemorial, sleepy schoolchildren have doodled on dusty old textbooks, while their teachers scratched away drawing complicated hieroglyphics on the chalkboard.
Promethean World is a company that aims to bring the classroom into step with the iPad generation, offering technology such as tablets for students and electronic whiteboards for the tutors.
The company listed in London in March and has endured a somewhat torrid time on the market since then. Its shares were priced at 198p and peaked at 213.5p before sinking. The stock came under huge pressure again yesterday, falling 19.9 per cent despite a generally well-received half-year trading statement. Revenues in the six months to the 30 June were up 35 per cent at £122.4m, with pro-forma net profits up by half to £9.6m. Jean-Yves Charlier, the chief executive, said Promethean was growing in "all of its key segments".
Investec said the stock trades at the low end of the sector, and put it on a price of 12 times estimated full-year earnings.
After yesterday's weakness, the longer-term trends and the company's solid fundamentals mean buying now could well pay off, so buy.
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