Investment Column: Tread carefully, but hold gloomy M&S

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The Independent Online

M&S

Our view: Hold

Share price: 369.7p (+2p)

Marks & Spencer hit the headlines over the weekend when it emerged that the high street bellwether had quietly scaled back its product return policy from 90 to 35 days.

But investors will be more concerned by the second-quarter figures M&S posts tomorrow. There will also be plenty of scrutiny about comments made by the retailer on any progress in its search to find a new boss to succeed Sir Stuart Rose, its executive chairman, before the end of July 2010.

Consensus forecasts point to M&S's underlying UK sales falling by 1.4 per cent in the second quarter – the same figure as the first quarter, although food is expected to have outperformed its clothing-dominated general merchandise division again. The retailer is expected to make more positive noises on gross margins, which has already caused some City analysts to upgrade its shares to a buy recommendation.

Previously, M&S had given guidance that its gross margins would be down by between 125 and 175 basis points in 2010, particularly affected by a hefty investment in its food pricing. However, City scribblers now expect a more modest drop of about 70bps, driven by aggressive negotiations with clothing suppliers. The more positive news on margins could lead to upgrades to consensus forecasts for M&S to deliver pre-tax profits of £540m this financial year.

Investors may be wise to tread carefully with M&S. Its shares have rocketed by more than 65 per cent this calendar year and the price is now above where it was in early June 2008 – before the worst of the credit crunch.

While other retail shares are more expensive, M&S's shares, which trade on a 2010 price earnings ratio of 13.5 times, are not cheap. Given that Sir Stuart is likely to endorse recent gloomy comments from rivals about a poor 2010 for the high street, investors may wish to hang on to their shares and place a bet on his eventual successor instead. Hold.



Roxi Petroleum

Our view: Sell

Share price: 10.5p (-0.5p)

The credit crunch has been a tough time for small-cap oil explorers, and it has been a tough time for Roxi Petroleum. "We struggled during 2008 to raise the funding we required to develop our assets at the pace we would have wished," the Kazakhstan-focused group acknowledged in yesterday's half-year results.

To keep work going on their best fields, Roxi put together a series of "farm-out" arrangements – bringing in other companies to help defray the cost. Work is now under way at Ravninnoe and Galaz, following deals with Canamens and Arawak Energy respectively. Shareholders also approved a further tie-up with Canamens over the BNG asset last month, although the company's management is now working on a separate deal with Baverstock – a shareholder in both Roxi and BNG.

The downside is the erosion of Roxi's portfolio. "Inevitably the result of the arrangements is that Roxi has a smaller interest in the assets it owns," the company said.

It is not all bad. Roxi has raised £600,000 through a new 10p share issuance and has agreed a $24m (£15m) credit facility with the GEM Global Yield Fund in New York as a "safety net", and the company says it is now in a good position. "It appears that the financial markets are beginning to return to a more positive state and the recent movements in the oil price are encouraging," the chief executive, Rob Schoonbrood, says. Yesterday's results also show the company's losses for the six months down from $18.3m to $8.9m in response to savage belt-tightening.

But with the $5m Arawak loan set to convert to equity if it not repaid by next June, and global economic recovery far from certain, Roxi is a sell.



Eurasia Mining

Our view: Hold

Share price: 1.35p (+0.2p)

Eurasia Mining is tiny even by the standards of the small-cap mining sector: with a market capitalisation of less than £4m, the group can be nothing more than a punt at the best of times.

The Russia-based platinum hunter has had an action-packed half year, including the completion of a capital restructuring, which took a long time to put together, but which has finally put it on a firmer financial footing.

For investors in small exploration companies, news of finds or promising test results are crucial for driving the shares. Yesterday Eurasia's stock jumped by 17.4 per cent after it reported "excellent progress" at its joint venture platinum project at its West Kytlim site in the Urals.

The encouraging news from West Kytlim is good, but it was yesterday that the share price benefited. We would wait for more good news before digging in. Hold.

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