Investment Column: Upbeat Petrofac is the sector's solid option

Rank Group; Chrysalis
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The Independent Online

Our view: Hold

Share price: 341p (+10.75p)

Petrofac, the oil and gas services group, issued a trading statement yesterday, hot on the heels of rival Wood Group, which had updated the market the day before.

Both are fundamentally solid and look attractive in valuation terms, but investors should be concerned about the volatile oil price, which makes for tough investment decisions on the part of production groups. Buyers choosing between Petrofac and Wood, however, should plump for the former. While its update confirmed that some customers were coming under "some pressure" on discretionary spending, the group was more upbeat than its peer the day before.

Petrofac said that it has "good revenue visibility" and a solid backlog of work. The group is also bidding on more than $10bn of tenders, and while a volatile oil price was the primary reason for advising caution on Wood Group yesterday, Petrofac's focus on lower-cost onshore projects in the Middle East and North Africa should offer some protection.

That said, the oil price wobbles are a concern, and despite the group performing well, Petrofac's share price has fallen as the price of the black stuff has sunk. In the last three months the stock has lost 40 per cent of its value as oil has fallen from $147 a barrel to around $40.

In valuation terms, experts at Evolution argue that due to a lack of exposure to the US gas drilling market Petrofac is better placed than its peers, and "we do not expect to see the same decline in earnings likely in other oil service stocks. On this basis the rating of 5.2 times looks attractive." The watchers say that the share price will hit 500p on the next 12 months.

We would agree that Petrofac is the most solid in its sector, and those looking for relative value should buy, but the market will punish the whole sector until the oil price stabilises. Hold.

Rank Group

Our view: Hold

Share price: 65p (+0.5p)

Legs eleven is the number in percentage terms that Rank Group's share price has risen in the last month. The owner of Mecca Bingo and Grosvenor Casinos issued a trading update for the 50 weeks to 14 December and while the last few weeks have been strong, especially against weak comparisons, the overall picture is disappointing, with like-for-like revenue down 7 per cent.

The company's position is, however, a lot less bleak than last year, which was Rank's annus horribilis. The smoking ban hardly helped, and on last year's Budget day, when the Government surprised many with a raft of gambling tax increases, the group issued a profits warning in response.

The last 12 months have been better, with Rank winning an action that declared that the amount of VAT levied on bingo was unlawful. The problem facing the company is that while it is emerging from a tough year, the rest of the economy has caught up, and even though Rank's bingo hall is now in order, it will suffer in the recession like every other company that depends on discretionary spending.

Punters will be pleased to know, however, that there is plenty of takeover speculation, with Malaysian investors now owning about 36 per cent of the group. Analysts at Cazenove, who say that the company is performing in-line with their expectations, believe that takeover speculation will "continue to provide some share price support despite uncertainty on the trading outlook and the absence of a dividend". Hold.


Our view: Hold for now

Share price: 45.5p (-0.5p)

Investors will be relieved to learn that Chrysalis's chief executive, Jeremy Lascelles, thinks it is impossible for the company to go bust during this economic downturn. Phew!

Indeed, Mr Lascelles reckons that the group, which signs and promotes musicians and bands, can emerge from the recession in a much stronger position, given that it is not dependent on trading and can rely on revenues simply by getting its artists on the air.

All good. What is not good is that the group's full-year numbers, published yesterday, showed an operating loss of £18.8m, down from £3.1m 13 months earlier. In fairness to the company it is only just emerging from a complete turnaround in which it has sold off its radio stations. Investors dislike uncertainty, and the stock has traded down nearly 60 per cent in the last 12 months. Mr Lascelles says the share price is comic and that the group is undervalued.

Analysts at the house broker, Numis, agree: "The group has consistently been a takeover candidate, and we expect it to be consolidated in the medium term." They put a price target of 95p on Chrysalis. We think this is ambitious, but like the idea of a takeover. Hold for now.