Investment Column: Trouble is brewing, so avoid SABMiller

Microgen; Asian Citrus Holdings
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The Independent Online

Our view: Sell

Share price: 950p (-20p)

The taxpayer has stumped up the cash to save the laggards that are the British banks. Hooray! The markets have been saved and everyone should buy shares when they have finished dancing in the streets. Er, no. Despite the fanfare that has greeted the great rescue, those with more than cotton wool between their ears will be conscious we are heading full steam for a recession and that those companies that depend on consumer spending are yet to feel the real crunch.

That is why investors should sell their SABMiller shares. The group, the world's third biggest brewer, issued its second-quarter trading update yesterday, saying that while beer volumes were up 1 per cent in the period, the outlook is "increasingly uncertain".

The finances are sound, and likely to meet first-half expectations, but after that things are likely to get trickier. The group's shares are down nearly a third in the last year with little on the horizon to push them back up.

Analysts at Citigroup argue that the stock is cheap, saying that "our price-earnings-ratio-based valuation assumes a 40 per cent premium to the index multiple of 9.3 times to December 2009, on the basis that we expect medium-term earnings-per-share growth at SABMiller to outpace that of the market. This results in an estimated fair value of 1,083p per share."

It may well be the case that the group can "outpace" the market and because of its operations in more robust emerging markets, if it is a brewer you are after, SABMiller may be worth a punt. Investors, however, should ask themselves if they want to own stock in a group which openly concedes that things are getting tougher. Top marks for honesty, but investors should still get out. Sell.


Our view: Buy

Share price: 42p (+6p)

There is not a company boss in the country who does not argue that his or her organisation is undervalued, especially since the stock market did its best kamikaze impression last week. The problem for investors is that often this is just bluster: an easy thing to say to shareholders who are demanding to know why their nest eggs are being threatened. What buyers should be looking for is a punt where the management are doing something about the shockingly low share price of their company.

Software group Microgen, which operates in the electronic bill, securitisation and wealth management sectors, issued a wide-ranging trading update yesterday, which as well as saying the full-year numbers were on course, announced that the company was set to launch a share buy-back programme, spending up to £8m buying back tendered shares between 40p and 50p. The move will be good for earnings per share growth but investors should probably be more concerned with the company actually increasing the level of the shares. In fairness to the group, it has made management bonuses conditional on the stock reaching 70p, a pretty hefty premium to current trading.

Analysts are certainly keen. Those at Investec reckon investors should buy (but do not think management will get their bonuses). "Clearly, management sees the shares as undervalued and is taking steps to remedy this. We make no changes to our forecasts or price-earnings-ratio-based target price of 65p and reiterate our... recommendation."

Martyn Ratcliffe, the executive chairman, says the only risks to the group in an operational sense are macro-economic but with cash of £20m and operational income of £6m on a market capitalisation before yesterday of £37m, the group is significantly undervalued, he says. There are going to be a number of bargains to be had in the coming weeks, assuming that the market returns to some sort of normality following the various banking bailouts. Microgen should be one of them. Buy.

Asian Citrus Holdings

Our view: Buy

Share price: 139p (+29p)

When Suzanne took Leonard Cohen to a place by the river, to be fed tea and oranges that came all the way from China, it is possible those oranges were produced by Asian Citrus Holdings, a group that produces the fruit in China.

The Hong Kong-based group's full-year results, issued yesterday, showing a 25 per cent increase in net profits, prompted a 26.4 per cent hike in the share price. Investors who fear they have missed the boat need not worry. Watchers at Merrill Lynch say that trading on a 2009 price-earnings ratio of 4.2 times, Asian Citrus trades significantly below its peer group.

The group concedes that growth is slowing, and ordinarily when talking about a European or US company that would be worrying. But growth in the Chinese economy is expected to contract from between 10 and 12 per cent, to around 8 per cent, a level those in the West would give their right arm for, even in good years. Investors fancying a speculative punt should seriously consider Asian Citrus Holdings. Buy.