Investment Column: Time to say au revoir to Premier Farnell
Ashtead; Salamander Energy
Friday 10 December 2010
Our view: Take Profits
Share price: 280p (-23p)
On the face of it, a good set of numbers from Premier Farnell, the FTSE 250 listed distributor of electrical components. Underlying pre-tax profits surged to £23.6m from £13.9m on revenues of £251.3m, up 23 per cent. Margins are up, the business is expanding internationally and its exposure to Asia is enviable. The company's impressive chief executive, Harriet Green, said the momentum of the second quarter had continued into the third, and who would doubt her?
So why the steep fall in the shares? Well, they've been on a spectacular run. This column first made them a tentative buy in the middle of last year, when they were down at 136p. We advised investors to hold on at 173.8p in December and then said buy again in June at 244p as our confidence rose.
Trouble is, it's now getting hard to see the shares going very far from the peak they have reached. The group benefited hugely from the first stages of the economic recovery as its clients restocked and boosted production, but the comparatives next year will be much tougher. Citigroup might be a little bit harsh in describing the business as "fundamentally low growth" (its note did a lot of damage to the shares) but it's quite hard to see Premier Farnell showing double-digit rises in earnings when figures for the third quarter of 2011 are released.
The valuation is also starting to look stretched at 16.86 times the consensus forecast for full-year earnings, while yielding an unexciting 3.27 per cent. Main rival Electrocomps, by contrast, trades on 15.66 times, while yielding 4 per cent. Fundamentally, Premier Farnell is a well-run, quality operation. But we think that now is a good time to take profits. We don't see the shares doing very much from here although we wouldn't hesitate to go back into the stock if it shows signs of protracted weakness and the valuation becomes less stretched as a result.
Our view: buy
Share price: 158p (+14.3p)
Faced with economic uncertainty, companies tend to tighten purse strings and put off big purchases.
Though negative for equipment manufacturers, these spasms of thrift mean big business for companies such as Ashtead, the equipment-hire business which revealed yesterday that first-half pre-tax profits had jumped by 41 per cent. Bolstered by robust demand in the US – which accounts for 80 per cent of revenues – the company said it now expected to beat its own hopes for the full year, lifting the shares and inspiring reams of supportive commentary from City scribblers who are readying upgrades.
And we have to concede that Ashtead looks set to continue drawing stream from the much-improved trends in its main market and elsewhere. Factoring in the potential revisions to consensus, the stock trades on multiples of around 5.3 times enterprise value to earnings before interest, tax, depreciation and amortisation, according to RBS, putting it behind rivals such as United Rentals. There is no point beating about the bush. We have to be bullish on this stock and recommend a buy.
Our view: buy
Share price: 253.1p (+8.1p)
After a tricky year, Salamander Energy's hard work may yet pay off after all. Hot on the heels of the oil-and-gas group's discovery at Angklung in Indonesia, announced last month, Salamander not only produced attractive estimates for Angklung yesterday, but also offered some tasty expectations for two nearby prospects. Angklung is thought to contain mean gas resources of a respectable 290 billion cubic feet (bcf). The Kecapi and Bedug prospects are estimated at 209bcf and 344bcf respectively, and their chances of success at 54 per cent and 61 per cent.
Salamander's shares have been treading water all year as the South-East Asia-focused group's drilling campaign delivered little more than some geologically interesting results in a virgin tract of Laos. The stock has gone up slightly after the Angklung news. It's worth betting on more.
Next year's busy schedule will start with appraisal at Angklung and further exploration of Kecapi and Bedug. The opportunity for swift commercialisation will be helped by the relatively shallow water, as well as by the closeness of processing plants on the coast and Indonesia's thirsty gas market. Analysts at Oriel Securities reckon Angklung and its related prospects have "the potential to be a company maker". We agree, and say buy.
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