Investment Column: Time to buy racier shares than De La Rue

Regal Petroleum; Northgate
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The Independent Online

Our view: Avoid

Share price: 920.5p (+17.5p)

Back in November, when we last looked at the banknote printer De La Rue, its then chief executive Leo Quinn was happy to extol the company's defensive qualities. According to Mr Quinn, there were no apparent risks facing the company.

Of course, it was very convenient for De La Rue to press its case as a defensive stock at the time the financial world was imploding and investors were filling their boots with anything that had the faintest whiff of being defensive. Thankfully, we have moved on from there and, as sure as night follows day, investors have rediscovered their appetite for racier stocks.

This is bad news for De La Rue, which issued a trading update yesterday that was in line with forecasts, except for a couple of one-off exceptionals. The company's shares are up on last November's price, but are actually down by more than 11 per cent in the past six months, just as others have improved by leaps and bounds.

In fairness to De La Rue, the experts are upbeat. "We leave our current forecasts unchanged, suggesting 28.9 per cent earnings per share growth to March 2010 and 5.6 per cent to 2011 with dividend yields of 5.1 per cent and 5.4 per cent respectively," Panmure Gordon said. "On a current price earnings ratio of 12.3 times, falling to 11.6 times, we still believe this represents good value given the visibility on earnings and track record of progress." The broker rated De La Rue as a "buy" and said the shares might reach 1009p.

We would concur that the dividend is solid and that the company is very strong operationally; it has little debt and generates plenty of cash. At other times in the cycle we would be happy buyers of De La Rue. Indeed, if we were to suffer a much feared but now largely dismissed double-dip recession, De La Rue would be a winner once more.

However, investors largely act in unison and the herd prefers riskier stocks than De La Rue at present. As such, investors will have a happier time if they back racier shares. Reluctantly, we would avoid the stock.

Regal Petroleum

Our view: Buy

Share price: 118.75 (+7.75p)

If you fancy a punt on Regal Petroleum, now is the time. This is not because yesterday's interim results showed that its revenues were up 30 per cent, production was up 50 per cent, operating losses had been trimmed by 41 per cent to $6m, and it had $160m in cash. No, it is because by late November the Aim-listed, Ukraine-focused oil and gas exploration group will have completed its resource update, which has a good chance of sending the rather undervalued stock bobbing upwards. Regal is already predicting that production will increase from 1,170 barrels of oil equivalent (boe) per day to 3,000.

Yesterday's technical report looks even more promising. The catchily-named MEX-106 well is on its way, having reached Visean- and Tournasian-age reservoirs as expected. But the drilling has also uncovered another layer of interest. "Instead of having one production and one appraisal under way, we now have an exciting, deeper, Devonian layer that we will appraise in parallel," said David Greer, the chief executive of Regal.

The equally notably-named SV-58 well, which was drilled to a depth of 6,300m in a record time for Ukraine, is also being appraised. With results from MEX-106 due shortly and those from SV-58 by the end of next month, shareholders are looking forward to hearing more – and if it is good news, the prospects are rosy.

"If you look at the fundamentals of what we are doing and the price of our stock, we are seriously undervalued," said Mr Greer. "Hopefully the resource update will put the cynics to bed and give our longstanding shareholders some comfort." We say buy.

Northgate

Our view: Cautious hold

Share price: 28.75p (+1.5p)

In the past year, Northgate, the van hire group, has suffered the double whammy of struggling companies returning their fleets of vans and a sharp fall in the value of its vehicles.

After its banking covenants came under pressure, Northgate, which operates in Spain and the UK, had to refinance and launched a rights issue this summer which raised £108m and helped it pay down its net debt by £205m to £681m. Further good news is that it will not now have to refinance its debt until September 2012.

Yesterday, in its interim results from 1 May to 15 September, Northgate said vehicle utilisation rates had averaged 91 per cent, up from 88 per cent last year. Northgate trades on a relatively low 2010 price-earnings ratio of 7.2 times and analysts believe it is a bargain. But the risk of a double dip recession in Spain, which has been one of Europe's troubled economies, means we are cautious and would urge "hold".

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