The Investment Column: Can-maker Rexam has the mettle to withstand slowdown
National Express; Sterling Energy
Friday 02 May 2008
Our view: Buy
Share price: 447.75p (19.5p)
Aluminium cans aren't made for toasting success, but from the point of view of investors, it probably does not get any better than Rexam, the world's second biggest consumer packaging group. The company is about as far away from the credit crunch as you can get, which makes it a natural defensive play. And after recovering from recent stumbles, now is the time to buy.
The group had a pretty disastrous 2007 by its own steady-as-she-goes standards when strikes at its US plants and its unhedged position against surging aluminium prices in Europe led to a 27 per cent drop in earnings. However the market for cans, which makes up about 70 per cent of the group's sales, is stable. And even in a heavily consolidated industry, watchers think that Rexam is undervalued. An independent analyst at Seymour Pierce said Rexam "measures up operationally and is the most efficient firm in the sector".
The company has no direct competitors in the UK, where the average citizen drinks about 120 soft drinks a year, and is valued well below Ball Corp, its US rival, say watchers.
UBS reckon earnings per share will increase by 30 per cent in 2008, and while that is in part due to the group's poor earnings performance in 2007, the analysts believe that the share price will hit 510p this year. That growth reflects the extra £20m profit the group expects to generate from a stabilising dollar and a strengthening euro versus sterling.
Seymour Pierce does not take currency benefits into account when recommending a buy, saying that earnings per share will rise to 34.8p in 2009 from 28p last year, while agreeing with the UBS target price of 510p.
Each year every American consumes 360 drinks from cans, and while that sector is saturated, Rexam claims a steady 24 per cent market share. Other areas of the world, particularly the Middle East and Africa, are seeing double-digit growth.
Last year's disappointing numbers are unlikely to be repeated this year – yesterday's first-quarter results suggest a much happier time. The company has renegotiated contracts in Europe, enabling it to pass on the cost of the aluminium to its customers, as it does already in the US. Buy.
Our view: Buy
Share price: 931.5p (5.5p)
Get on the bus. National Express, one of the UK's top transport groups, informed investors yesterday that things are ticking along just fine thus far this year. Amid the flurry of doomsday forecasts from property companies and retailers, chief executive Richard Bowker's bus, coach and train giant seems to have avoided any speed bumps thrown up by the slowing economy. Bus and coach revenues were up healthily, in line with analyst expectations, while rail did slightly better.
There are some leaves on the line. Passenger numbers on the Stansted Express train service to the airport have weakened. Squeezed by above-target inflation and worries about job cuts, people are apparently less willing to splash out on the weekend breaks abroad that are the speciality of the Essex airport.
The related argument however is that as more people stay in-country, they are more likely to jump on a coach for a quick break away. Perhaps that is why National Express's mood remains uncommonly sunny. It reiterated its pledge yesterday to increase the dividend by 10 per cent through each of the next three years.
Any worries about being hit by a UK slowdown are also tempered by the company's growing international operations. After its acquisition last year of Continental Autos, it is now the largest private-sector transport group in Spain, where turnover has increased by the predicted 5 per cent while costs were taken out through the integration of the business.
Since reaching a high of 1318p per share in October, the shares have shed 30 per cent amid worries about the economy and the soaring price of petrol. The company now trades at a discount to the sector despite solid prospects. Get on while you can. Buy.
Our view: Hold
Share price: 9.47p (+0.31p)
Sterling Energy has decided that the United States is not the land of opportunity after all. The company reckons it is actually better off somewhere rather more hostile: Iraq.
The oil and gas exploration company aims to sell its operations in America and on Kurdish northern Iraq, Madagascar and Gabon. The group has faced increasing costs associated with drilling in the US and has come close to missing covenant requirements in its $153m of syndicated bank debt, something that the chief executive, Graeme Thomson, argues has driven the share price down.
However, for investors willing for a white-knuckled ride in the next couple of years, Sterling Energy might just be the group. There may be 2 billion barrels of oil in its Kurdish fields.
Analysts at Oriel Securities point out that sites in Iraq and Madagascar are not actually pumping out any of the black stuff yet. As a result "the company is very difficult to value". Hold for now.
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