The Investment Column: Hold on to Lookers as it revs up for a bumper year

Climate Exchange; Hochschild Mining
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The Independent Online

Our view: Hold

Share price: 85p (-2p)

The car dealership Lookers celebrates its centenary this year. It has come a long way since starting with just one shop in Manchester in 1908.

"On every multiple, this is fundamentally cheap," say analysts at KBC, despite recommending a "hold" rather than a "buy" due to concerns that the nervous market will not reward the group, irrespective of performance. But those happy to take a punt on the company will be further encouraged by the fact that the firm and analysts are looking forward to a bumper 2008.

True, the market for new cars is expected to suffer this year as people cut back on luxuries, wary that their jobs could become the victim of the economic downturn. But this is actually good news for Lookers. Analysts at Numis agree that car sellers may come under pressure this year, "yet a closer examination of the group's earnings components lends substance to the view that Lookers is significantly more resilient than one might expect".

While the company is a big car seller, 54 per cent of the group's gross profit in 2007 was generated from after-sales services and maintenance; if people do start to feel the financial pinch, they are more likely to have their old car fixed rather than buying a new one, so the argument goes.

Even so, few would say that Lookers is under pressure on car sales either.

The market grew by 2.5 per cent last year, with Lookers reporting an increase of 9 per cent And, with about 20 per cent of all cars sold in March, the firm is having a stellar month – its finance director, David Dyson, says it had moved 80 per cent of its total sales target for the month by 3 March.

Profits were up 7 per cent to £23m and that was tempered by a loss of £4.2m on its car supermarkets, where the group has replaced management teams. Mr Dyson also argues that the figures suffered because of the firm buying the dealership Dutton Forshaw in October last year, "the worst time of year to buy a dealership".

Mr Dyson suggests the biggest challenge facing the company in 2008 is a collapse in consumer confidence. He need not worry too much, say watchers at Numis, who argue: "Lookers would not be immune in a full-blown recession; however, the name already seems priced for such an eventuality." Hold.

Climate Exchange

Our View: Buy

Share price: 1,441p (+201p)

"The real sex appeal of this business," says the chief executive, Neil Eckert, "is the potential size of the market".

Climate Exchange, which published its 2007 results yesterday, owns the European Climate Exchange and the Chicago Climate Exchange on which environmental contracts, particularly carbon, are traded.

The only way is up, according to Mr Eckert, who believes the company is set to enter a golden era; the only risk on the horizon, as far as he is concerned, is competition from Johnny-come-latelies, whose attention is drawn to this expanding sector.

In a way, it is hard to argue with him. Only 5 per cent of the world's carbon is traded, and, with political sentiment behind greater use of environmental trading, the argument runs that the market can only grow. Indeed, Mr Eckert reckons that, regardless of who wins the US presidential election, the move towards mandatory carbon trading in the US, as in the European Union, is inevitable.

Analysts at Morgan Stanley agree the market is growing rapidly. "We expect carbon to develop into a mature commodity: the crop is larger than US corn and soybeans combined, but traded volumes are only a fraction," they say.

There are risks. Some say the economies growing the fastest, such as those in China and India, show little regard for the environment compared to making money. This is untrue, argues Mr Eckert, who says these countries are starting to recognise the importance of carbon trading.

Trading volumes last year increased 128 per cent on 2006 and the company holds an 85 per cent market share. It reported a pro-forma pre-tax profit of £850,000 in 2007, after a loss of £5m the previous year. Buy.

Hochschild Mining

Our view: Buy

Share price: 415p (+9p)

As a former prime minister of Peru, Roberto Danino, who is now the deputy chairman of Hochschild Mining, is used to spinning a good story, but there was little need to embellish the group's results published yesterday as profits rose 104 per cent to $85m (£42m).

The company's main occupation is mining for gold and silver, mainly in Peru and Argentina, and, with commodity prices soaring, analysts like those at Cazenove, who recommended an "outperform" stance, reckon the share price is set to rise.

Citigroup suggests the price of silver, the company's major business, has been subject to greater volatility than other precious metals in recent years, and says the governments in Peru and Argentina have a growing inclination to take a windfall from the boom in prices.

Mr Danino rejects these points as minor and points to the strength of the group's balance sheet, saying it has cash reserves of $300m and an outstanding loan facility of $200m. Buy.

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