Investment Column: Xstrata has issues to address but is cheap

Inchcape; Boomerang Plus
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The Independent Online

Our view: Buy

Share price: 1002p (-25p)

Compared to the announcements we have become accustomed to, yesterday's third-quarter production numbers from Xstrata were a tepid affair.

Last week the group walked away from its nil premium bid for rival Anglo American after Anglo persuaded its shareholders that the approach would not have saved enough money. So where does that leave Xstrata's shareholders?

The production numbers were a mixed bag: on the one hand, overall output was up thanks to a 9 per cent jump in coal production, while the group hailed its financial performance. "Xstrata's operating and financial performance continues to be strong, and the company's financial position remains robust," it said in a statement.

We also think that shorter-term dynamics in commodity prices will play into Xstrata's hands, with demand for coal and copper, which make up the majority of its portfolio, expected to surge. Indeed it has already started, with the company's share price rising by nearly 50 per cent in the last three months, although it is still way below the more than £25 level in May 2008.

Investors should question why Xstrata was so keen on Anglo, however. The target has a better mix of assets that will see it preferred by many investors later in the cycle when coal and copper prices are expected to drop. Punters may be concerned that copper output fell 10 per cent in the third quarter, while a strengthening South African rand is unhelpful for exports.

Having failed to net Anglo, at the least for the time being, Xstrata still needs to work out what it will do. Will it make another offer for Anglo? Will it relaunch last year's unsuccessful bid for Lonmin, in which it still owns 30 per cent? Or will it try something different? At this stage, nobody knows.

Trading on a 2010 price earnings ratio of 11.8 times, Xstrata comes at a discount to other miners, and this, along with current macroeconomic conditions, persuades us to be buyers. The group must address the longer term, however. Buy.


Our view: Avoid

Share price: 35.15p (+2.28p)

Inchcape is not the sort of company one might expect to benefit from Britain's cash for clunkers scheme, given its positioning towards the upper end of the market. But apparently some of those scrapping their bangers are using the cash to buy rather more upscale models than might have been expected. As a result, while third-quarter revenue was down 16.5 per cent assuming constant currencies, it was up 2.2 per cent on the second quarter. Those figures were rather better than analysts had been expecting, so yesterday's third-quarter trading update counts as a reverse profit warning (a profit warming?).

It's not just the UK, either: Australia and Hong Kong outperformed, and the group is benefiting from its global reach. Time to buy in?

Well, maybe. The UK market will slow next year when the scrappage scheme ends. Chief executive André Lacroix admits as much, although he says he expects continued growth from Hong Kong and Australia, together with a pick-up in Greece, which is planning a three-year scrappage scheme. The rest of Europe, though, is less happy, and visibility remains weak.

We last looked at Inchcape when we said sell at 258.75p, which now looks a very good call. After upgrading forecasts on the back of the trading statement, Cazenove now has Inchcape trading on 13.9 times next year's forecast earnings - down from 19. That's still not cheap enough for us (there's no dividend). We credit the company for outperforming, but prefer to remain on the sidelines for now Avoid.

Boomerang Plus

Our view: Buy

Share price: 80p (1.5p)

Boomerang Plus will be filming exclusively at this year's Freeze festival, which has Olympic-level ski and snowboard jumping and cutting-edge bands near Battersea Power Station.

The independent TV producer's share price has unfortunately followed the downward trajectory of the skiers, but there are reasons to think a jump could follow. Yesterday it bought Indus Films, a Welsh production company, to broaden its portfolio beyond extreme sport and kids to environmental, natural history and arts. It follows the buy of the snowboard magazine publisher Method and a £12m contract win with Welsh channel S4C.

Boomerang has no bank debt and constant revenue streams from S4C. The extreme sports programming is on Channel 4, and it is looking to take its contract win overseas. Its results later this week cover a bad period, so the shares could slip again. But like the extreme sports nuts, we're willing to take a leap into the unknown and buy.