Investment Column: Unemployment may dent Next's shares

Dragon Oil; Brammer
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Our view: Hold for now

Share price: 1618p (-26p)

The clothing retailer Next put out its first-half trading update yesterday, a week ahead of schedule, announcing that profits will be better than the group had previously expected.

The news comes after a cracking six-month run for investors, during which the shares have followed the upward trend of many decent companies on the high street, rising by more than 40 per cent. Punters can also take heart from chief executive Simon Wolfson, who says that he expects trading to carry on for the next six months, much as it has recently.

However, despite the positive update, we would not be buyers. Retailers took a hammering at the turn of the year as consumers felt the brunt of the nuclear winter that followed the banking crisis. While many share prices have bounced back, we see increasing unemployment as a real problem for the high street. Mr Wolfson disagrees, arguing that the rate of joblessness is not increasing and neither unemployment, nor concerns about swine flu, has had any affect on the group's sales season.

We would worry that the sheer extra numbers of unemployed will hamper sales in the second half of the year, while the respected Ernst & Young ITEM club said on Monday that if the incidence of swine flu hits worst-case estimates, the UK economy would contract by 7.5 per cent.

Mr Wolfson argues that the next six months should be similar to the last six, and that as consumers face lower mortgage payments, they will be freer to spend more at places like Next.

The analysts differ on whether or not the stock is expensive, with some advising clients to take profits and others saying the market does not fully value the stock. We would sit on the fence given the group is performing well against its peers. We are still nervous about retail more generally, however, especially as unemployment gathers gather pace. Hold for now.

Dragon Oil

Our view: Buy

Share price: 312.5p (-12.75p)

The price of oil has roared back in the last few months, and so has the share price of Dragon Oil, the development and production group that has its operations in the Caspian Sea off Turkmenistan.

The company issued its first-half trading update yesterday saying that while average production increased by 11 per cent in the period, this was still behind its expectations after changes to its drilling programme.

All this matters little, in our opinion. The group's stock price ebbs and flows with the oil price, and barring any disaster in terms of production or licences, we do not see that changing. With the price of the black stuff continuing to make up some of the ground it lost towards the end of last year, we do favour groups like Dragon.

The story on Dragon is a little more complicated, however. The group's share price has jumped up 148.5 per cent in the last six months, not only on the back of a rising oil price, but also because the UAE-owned Emirates National Oil Company (ENOC), which already holds 52 per cent of Dragon, has made an offer for the rest of the group. Given its dominant position in the company already, we think any collapse in negotiations would not have such a marked impact on the share price.

The Evolution analysts say there is little in the way of exploration upside, but say "add", pointing to the company's net asset value of 461p. Buy.


Our view: Cautious hold

Share price: 111p (-11.5p)

"Sales in May and June... were at a similar level compared with March and April, suggesting we have reached stability... There are some signs of increasing demand from our automotive and 'Tier One' customers," Brammer said in its first-half trading update yesterday.

Despite the "quietly confident" message from the industrial maintenance distributor, the market was not overly impressed, with the shares falling by 9.4 per cent. "I've given up trying to predict the gyrations of the stock market," says a well-briefed Ian Fraser, the group's chief executive, echoing many a company boss who sees his shares fall after a market update.

Mr Fraser says the group is winning market share, and in the last three months, performance has been encouraging. This trend has already been captured by investors, with the stock rising by nearly a third in the last three months, before yesterday.

Moreover, the experts at KBC say they expect the shares to "re-rate" towards their price target of 150p.

We are not as convinced. Yes, the group's performance has improved as the economy has woken up from its long hibernation of the last few months, but we believe investors are still very nervous about industrial groups. We would hold on for better news on the economy. Cautious hold.