The Investment Column: Bid war is best bet for handsome Cairn payday


Cairn Energy

By Alistair Dawber

Our view: Hold

Share price: 2834p (+32p)

If you had bought Cairn Energy shares in 1992 when they were trading at 27p, you would have made a lot of money in the last 16 years. It is this growth record that Sir Bill Gammell, the firm's chairman, would like investors to contemplate in the future.

Sir Bill has several reasons to be cheerful. The company has upgraded production estimations at its main Indian site in Rajasthan to 175,000 barrels a day by 2009, and reckons that there is about 10 years' worth of the black stuff at the site.

On the other hand, a number of analysts are not so sure about the company. They agree that the news on reserves from Rajasthan is good, but several are worried about the cost of the project, which watchers at Oriel Securities describe as being "significantly above expectations. The shares are now trading above our valuation but deserve a premium for potential oil price upside ... However an outright 'buy' recommendation looks a little bullish and we may revisit that," they say.

Other analysts look at the group more favourably, with ABN Amro saying the firm's stock price is likely to get as high as £32.60.

Several watchers see the group as a serious takeover target, and as with any takeover battle, this would push up the stock. According to those at Oriel, there is a 25 to 50 per cent chance that the group will be bought; "they are the most credible takeover candidate [in the industry]," they say, adding that the likes of Shell and Talisman are said to have already had private talks.

Sir Bill refused to be drawn on the likelihood of a buyout, while analysts at Seymour Pierce reckon that the group's share price has very little room to grow. They believe instead that Cairn's subsidiary Capricorn is likely to be spun off, and that that group would be a better buy.

The firm published its full-year results yesterday, showing a pre-tax profit of $1.53m, but most analysts ignored the numbers, preferring to comment on activities in Rajasthan.

If the oil price stays as high as it is, Cairn will be a safe bet for investors, but any significant gains are likely to come from a bidding war, and that could provide a handsome payday. Hold.

YouGov

Our view: Buy

Share price: 149.75p (-4.25p)

YouGov might be in the opinions business, but the facts speak for themselves. Despite the polling and market research group being characterised as a media stock, the company is booming, with 2008 expected to be another bumper year.

Last year was seminal for the company, which made three acquisitions, in Scandinavia, Germany and the United States, all of which contributed to a trebling of first-half revenues to £18.8m.

The company's chief executive, Nadhim Zahawi, reckons this year will one of consolidation, and seems relieved that the firm was not judged to have "bitten off more than it could chew," with the three takeovers.

Unlike many firms toiling in credit crunch, particularly in the media sector, he says YouGov's research business will benefit from firms relying more on strategic market research. According to the group, it has just contracted with "a top four UK supermarket" after being overlooked by the same company two years ago.

It is also pretty hard to find challenges for the group. True, they are a media stock and generally that sector has been much troubled, but they are helped by the fact that their polls are online, where advertising is expected to be up 21 per cent in 2008, compared with the whole industry, which will see just a 4 per cent rise, according to watchers at Numis.

The longer the economic downturn continues, the harder the sector will feel its effects, but YouGov has so far ridden out that particular storm, with organic growth up 43 per cent. Likewise, acquisitions also provide obstacles, but the firm is likely to work on integrating last year's add-ons for a while before entering the market again. Buy.

Neville Porter

Our view: Sell

Share price: 0.35p (-0.05p)

Some industries are seen as defensive options during a period of economic decline, others are seen as being downright toxic. Bookmakers are generally seen in the second category, as people worried about job security cut back on things like gambling, especially when fuel and food inflation is soaring.

All this is very bad news for Neville Porter, which reported results for the six months to 31 December yesterday. While the numbers, at a loss of £300,000, were an improvement on the previous half-year, the future by the group's own admission is likely to be very tough.

"We struggled with margins due to payouts to customers at well above budgeted levels," said the chairman, David Soley, in yesterday's statement.

It is arguable that the group has done the right things. It has improved turnover, has a new call centre to take bets over the phone, and reports that 40 new internet accounts are set up every week, but that will not be enough for the group to enjoy the immediate future.

There is usually something good to say about a firm's prospects, and while Neville Porter has stepped back into what it describes as its core markets of horse and greyhound racing and football, it is very difficult to imagine the company in the winner's enclosure any time soon. Sell.

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