The Investment Column: Bunzl's defensive qualities have been overlooked

Chemring; Regal Petroleum
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The Independent Online

Our view: Buy

Share price: 657p (-8.5p)

Some investments are as safe as houses, so the saying goes: but as this myth may be being dispelled as house prices start to fall, the saying may soon change to, as safe as Bunzl.

The outsourcing and distribution group, which is predominantly in the food and healthcare sectors, is about as far away from the credit crunch as it is possible to get. The price of oil, from which many of the group's plastics products are made, is a risk but that adds only up to £2m of costs and unless the economy really takes a turn for the worse, the chief executive, Mike Roney, sees very little to trouble the company.

So far so good, but if investors want to buy they had better do so quickly. The company rejoined the FTSE 100 at the end of April and the shares have been volatile since then. Despite a rather terse trading update yesterday, experts at Seymour Pierce say: "The shares are not expensive on around 13.5 times 2008 earnings, and having fallen after the FTSE 100 entry, we believe they now offer a buying opportunity."

The watchers say the stock will reach 720p. This is nothing reckons Mr Roney, who points out that the shares have been as high as 757p since the return to the top table.

Acquisitions make up about two thirds of the group's growth, and that will continue, says Mr Roney. He points out that the company targets small family-owned businesses that allow the group to continue its policy of getting just about everywhere across the globe. This gives Bunzl scale, he says, pointing out that many of its competitors are localised firms.

While Bunzl might not exactly get the pulses racing in terms of its operations, investors can be sure that the stock is a defensive play. In the short term, there is the potential for some profit making, but be quick. Buy.


Our view: Buy

Share price: 2,199p (-123p)

The defence group Chemring is making lots of money. Investors impressed with the group's full-year results announced in January will now be even more impressed as the stock has moved on strongly since then. The best news of all is that the share price will carry on growing. The analyst were queuing up to say "buy" yesterday after the group announced a 17 per cent increase in pre-tax profits for the first half of the year, saying that the order book, at £425m, stands at record levels and "remains eye-catching", say Oriel Securities.

Watchers at UBS say that the shares will reach 2,600p and that, "on a [estimated] 2009 EV/EBITA of 9.4 times and a price-earnings ratio of 13.9 times. We believe [the 2,600p price target] fairly balances the strong growth prospects against the risk of a US troop withdrawal from Iraq."

That is frankly the only problem for potential investors. The group depends on the US Department of Defense for about 50 per cent of overall revenues, and with spending in Iraq and Afghanistan having increased hugely in the past few years, the group has done well. The chief executive, David Price, says it does not matter which of the two presidential candidates wins, and that the group does not explicitly support either Mr Obama or Mr McCain. However, with the Republican saying that the US could be in Iraq for the next 100 years, it is easy to see how the group might most benefit.

The shares were 5.3 per cent off yesterday as the company announced that it was going to raise £60m through a rights issue to fund the acquisitions of Martin Electronics, an ammunition and pyrotechnics maker, and Scot, an American defence group.

Frankly, there are few investment reasons not to back Chemring. Investors will be aware that as a defence group, Chemring's products do kill people and that will be enough to dissuade some. Buy.

Regal Petroleum

Our view: Buy

Share price: 287.5p (-4.5p)

The chief executive, David Greer, concedes that some investors have not forgiven Regal Petroleum after what he admits was not its finest hour back in 2005.

At that point the company raised lots of money to go looking for oil off the Greek coast and found, well, nothing.

However, Mr Greer stresses that investors are now dealing with a different beast and that the focus of the group has changed to its production fields in Ukraine, which are actively pumping out the black stuff. By the end of next year the group is hoping to have increased production three-fold and be "cash positive" by early 2010. In full-year results announced yesterday, the company said it had narrowed its loss to $19.6m, down from $114.8m last year.

Regal's shares have done exceptionally well in the past three months, up from 122p at the end of March. New buyers, however, need not think the game is up with analysts saying that there is plenty of slack left in the stock. Those at Fox-Davies Capital reckon the group is trading at a 35 per cent discount to the oil and gas sector, and argue that the shares should be trading at 350p.

Some investors that were burnt in the Greek tragedy of 2005 may avoid Regal on principle. Good for them. Those that do not share such misgivings would be well advised to buy. Buy.