The Investment Column: Dig in to Vedanta now for longer-term growth

Morse; Somero
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The Independent Online

Our view: Buy

Share price: 1556p (-29p)

The Indian mining giant Vedanta Resources, a group that is not reluctant to spend vast amounts of money to boost production, said yesterday it is restructuring itself. Part of this will include spending $9.8bn (£5.5bn) on projects to increase aluminium production.

The group is set to look more like a traditional mining group, with three distinct divisions below a holding company, and, while it was cagey on how it will fund the expansion, the investment will include issuing new equity, as well as debt and cash.

However, the analysts were falling over themselves to recommend the stock, which trades on a 2009 price earnings ratio of about nine times – a discount to its UK peers, which typically trade on between 10 and 14 times.

Investors probably will not see any near-term benefits: the shares were down 1.8 per cent yesterday, but, with the market for aluminium in India alone growing annually by nine to 10 per cent, the group's plans to be churning out 2.6 million tonnes by 2012 look to be on the right course.

Watchers at Morgan Stanley say the announcement will put Vedanta in the top five aluminium producers in the world and that the increase in production will add about £11 to the share price at net present value. Other miners, such as Rio Tinto, also plan to increase production and that will limit Vedanta's growth, but, nonetheless, the stock will almost certainly be lifted by yesterday's announcement.

Aluminium prices have fallen 20 per cent from $3,380.15 a ton in July, and a number of Chinese producers stopped production altogether in July and August to stimulate prices. However, the longer-term prognosis is for a reversal of the recent trend and investors should buy now. Buy.


Our view: Sell

Share price: 37.75p (-1.75p)

The IT group Morse's full -year results should come as a relief to the market. Or, they are as bad as expected.

Those were the differing views of analysts yesterday after the group published its full-year results showing a pre-tax loss of £2.3m, compared to a profit last year of nearly £4m. The company says this pretty woeful performance is down to any number of reasons: a lack of growth in services, losses recorded on fixed-price contracts, a cut in the gross margin "across most of the business" and continued poor performance in Spain in the second half.

Investors may be impressed by this mea culpa, but are certainly not too impressed by fact that the stock has fallen by more than two-thirds in the past 12 months.

However, with a new executive chairman in place, Kevin Loosemore, and the news that the company has replaced its finance director, Morse will be hoping for a fresh start. Analysts at Panmure Gordon say the numbers were bad, "but positively the business does not seem to have deteriorated further. On another positive note, we note the appointment of Mike Phillips as CFO."

The watchers did, however, cut the group's target price to 44p, a level it passed on the way down less than a month ago.

Those at Investec are more bullish, saying the stock will get to 93p, arguing: "Trading on a cash-adjusted 2008 price earnings ratio of [about] five times, we believe a clear valuation disconnect exists. We see the stock as having been oversold and believe these results should prompt a re-rating".

Should? Maybe, but the shares have been on a downward trajectory for a while and the market needs some good news on the numbers to charge them up. Yes, there are some good things happening, such as a restructuring making the business simpler, but investors should wait for something more substantial. Sell.


Our view: Sell

Share price: 39.5p (-2p)

Somero, a company that makes laser-guided technology that helps to ensure big concrete floors are flat, said yesterday that a highlight of its interim results was the fact they are in line "with management's expectations following the 15 May update on trading".

The problem for investors is the stock dropped like a bomb on May's update, which was in fact a profits warning, and has not recovered. Indeed things have got worse for the share price.

The group said yesterday it made a pre-tax profit of $3.1m in the six months to 30 June, down on the $5.4m made in the same period last year. The market was certainly not too impressed with yesterday's numbers, with the shares down another 4.8 per cent.

Chief executive, Jack Cooney, says that non-US markets are now contributing more than 50 per cent of revenues, and are booming. Europe, which makes up 80 per cent of the non-US business, grew by 27 per cent last year. Moreover, with its technology patented and a 99 per cent-plus market share, investors would be buying a safe company.

His arguments are supported by analysts at the house broker Collins Stewart, who reckon the stock is cheap, trading on "a little over four times earnings and a significant discount to... fair value of 151p."

We like the company but think the profits warning still smarts and that the stock will take some time to recover. Sell.