The Investment Column: Dig into 'undervalued' BHP after record figures

Findel; Tribal Group

Our view: Buy

Share price: 1,521p (-16p)

As the world's biggest mining company, BHP Billiton is forever in the public eye. Whether for Monday's record annual results, with operating profits up nearly $4.5bn to $24.1bn (£12.9bn), or for the long-running takeover saga with its rival Rio Tinto.

For investors, however, the story is pretty simple. Owning shares in BHP Billiton has been a profitable business with the stock up 25.5 per cent in the past 12 months. Even if the profits were predicted by most watchers, the dividend paid to shareholders was a nice surprise, with payments up 48.9 per cent.

There are worries: some commodity prices have fallen in recent months and power outages in South Africa have hindered operations there. Chief executive, Marius Kloppers, argues, however, that prices in the company's main markets – copper, petroleum and iron ore – are increasing, with BHP set to increase production.

If there is a white elephant in the room, it is the group's long-running battle for control of Rio Tinto. This is a distraction for the company, but according to Mr Kloppers, once European and Australian regulatory hurdles are overcome, hopefully later this year, details of the offer are expected to be sent to shareholders over Christmas.

From a valuation point of view, investors should be encouraged. The company claims to be frustrated at not being able to buy back the stock with several analysts also saying it is undervalued.

"We are likely to settle on full-year 2009 EPS of around 400 cents, which is unchanged following [Monday's] in-line results," say those at Numis. "This leaves the stock on a P/E of 6.2 times in full-year 2009 and a 28 per cent discount to our current DCF [discounted cash flow] of 2,113p. We will revisit our overall sector view and stock selection soon, but maintain BHP as the top pick." Buy.


Our view: Buy

Share price: 177.25p (-3p)

Everyone deserves a second chance, so the saying goes. For investors willing to give Findel another go after royally messing up earlier this year, now could just be the time to buy.

Back at the start of April, the home shopping group said everything was tickety-boo, only to issue a profits warning two weeks later saying it was heavily exposed to bad customer debts that would knock profits.

Chief executive Patrick Jolly concedes that the situation was of the board's own making and that things were badly managed. True, but the situation also means that the market will struggle to trust the group in the future and that will have an adverse effect on the stock.

However, every cloud and all that. The profit warning preceded a kamikaze-like drop in the shares, which have lost nearly three quarters of their value in the past 12 months, down from a year high of 717p. Couple that with the fact that directors have been buying the stock like it's going out of fashion since, and you have a case for buying the shares.

It is true that now is a traditionally quiet time for the group: Christmas is busy for home shopping, and its education arm obviously does better when the schools are back. However, the shares are cheap, with watchers at Seymour Pierce pointing out that "we believe the stock is undervalued... and on the basis of our low end of the range forecasts is rated at only 3.8 x 2008/9 earnings, based on a pre-tax profit of £54.5m and EPS of 47.2p".

Those investors who got burnt in April may wish to avoid Findel from now until eternity, which is perfectly understandable. For those who are looking for a bargain, however, Findel could be perfect: the company and the analysts are confident that, with the group's busiest time of the year around the corner, the shares are set to rise. Buy.

Tribal Group

Our view: Hold

Share price: 135p (-0.5p)

As every investor worth his salt has known for some time, outsourcing groups are as safe as houses. Or in fact, even safer given the way that sector has crumbled in the credit crunch.

But that is becoming a problem for those a little slow on the uptake. Tribal, which concentrates its efforts on public sector outsourcing, issued a very decent set of interim results yesterday, saying that adjusted pre-tax profits in the six months to the end of June were up to £9.1m, from £6.6m a year ago. This sort of stellar performance is usually greeted by a jump in the stock, but Tribal's numbers were already factored in to the share price.

Yes, the group is a safe bet, but today's buyers are wasting their money if they are hoping for bumper returns. Analysts at Kaupthing show that the group is performing well, but no better than the rest of the support services sector. "The shares are trading on CY08E and CY09E P/E of 10 times and 8.5 times respectively, in line with the wider consultancy average PE of 10.5 times and 9.3 times."

It is tricky to see what will give the stock the oomph to get it going. Tribal is expanding in the Middle East, but that is not revolutionary among its peer group. Hold.

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