The Investment Column: Dairy Crest is crème de la crème of defensive picks

Central African Mining and Exploration; Mothercare
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The Independent Online

Our view: Buy

Share price: 391p (+35.25p)

When things start to get a little painful, there is a lot to be said for getting back to basics. Assuming that investors have to put their money somewhere, they should ideally be looking for a cash-generative company that operates in a defensive sector where it is able to pass on higher input costs. If the company is under-valued too, bingo.

Dairy Crest, the makers of Cathedral City and Utterly Butterly, updated the market yesterday, saying that sales in the three months to 30 June were up an impressive 14 per cent and that management's expectations were being hit.

Its chief executive, Mark Allen, says the strong performance is largely down to the fact that, in times of economic woe, the group is a defensive pick, being a producer of simple, traditional foods that consumers are likely to revert to. Mr Allen argues that costs are under control and while the company is managing to pass on a reasonable amount of inflated prices to customers, he says the group is careful not to make its products too expensive.

What is even better for potential investors is that the group is undervalued. Mr Allen reckons that Dairy Crest's share price – down nearly 50 per cent over the last 12 months – has suffered in a general selling-off of mid-cap assets. Experts at Panmure Gordon say that "the shares continue to look very appealing and cheap in our view on a current year [price-earnings ratio] of 6 times – at odds with the group's highly branded and added-value portfolio and also support a highly secure dividend yield in excess of 7 per cent".

There are concerns over the company's debt but at £475m it is perfectly manageable, says Mr Allen. The market seemed to agree yesterday, with the stock climbing 10 per cent. Buy.

Central African Mining and Exploration

Our view: Buy

Share price: 45p (+1.5p)

It is a pity that Central African Mining and Exploration Company (Camec) is best known because its chairman is former England Test cricketer Phil Edmonds. That is not because Mr Edmonds is a bad chairman, far from it, but rather because this does tend to cloud the fact that, in most respects, it is a very good company.

The group operates in Africa, with copper and cobalt interests in the Democratic Republic of Congo (DRC), as well as coal mines in places such as Mozambique and South Africa. The group said yesterday that annual pre-tax profits were up to £54.2m, an improvement on the £22.4m posted in 2007. This came as no surprise to analysts at Credit Suisse, who last week increased their price target from £1.20 to £1.60.

There is yet further good news. On any measure, the stock is drastically undervalued, coming in at 5.4 times estimated 2010 earnings, according to watchers.

There are a number of reasons for this: Camec says that its coal mining business is not reflected in the share price, which is true. The company's solution is to spin it off, which is expected to be formally announced soon.

However, there is also considerable political risk associated with investing in Camec, with Ambrian's experts saying the stock is "not for the faint hearted". It was only earlier this year that the group managed to eventually secure its licences in the DRC after the government undertook a review of which groups it would deal with.

Buyers may also be concerned that the group remains operational in its platinum mines in Zimbabwe. Even though a raft of organisations are pulling out of Zimbabwe and international bodies are proposing sanctions left, right and centre, Camec feels happy to remain. Investors should buy the stock for investment purposes, but some will question whether it is right to run a business in Zimbabwe. Buy.


Our view: Buy

Share price: 346.25p (unchanged)

No matter how bad the fin-ancial crisis gets, and no matter how little money consumers have to spend with retailers, babies are still going to be born.

This is great news for Mothercare, which was readmitted to the FTSE 250 last month. Over the last year, the group has considerably outperformed the retail sector, with the stock down just 14.5 per cent.

Its chief executive, Ben Gordon, says that this is in part due to the group being naturally more defensive because of what it does, but also because it has increased sales over the internet and internationally. In a statement issued yesterday, the group said that sales in the 15 weeks to 11 July were up 20.7 per cent.

Given that the stock has moved relatively little compared with other retail stocks in the past 12 months, investors could be forgiven for assuming that there is little juice left in the shares. Well, watchers at Dresdner Kleinwort did cut the target price 20p to 370p, but others, like those at Investec, say buy, despite Mothercare trading at a premium.

"The recent weakness of the shares has eroded this premium, with the shares now on a [estimated] 2009...price-earnings ratio of 9.6 times, offering an interesting entry point." Buy.