The Investment Column: International Power shares look fired up

SVG Capital; Bulgarian Land Development
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The Independent Online

Our view: Buy

Share price: 385p (+24p)

No matter how bad the downturn in the UK economy, workers will still demand air conditioning at work, computers will need electricity and household goods will continue to use energy.

This is good news for International Power, which posted results yesterday that were broadly in line with market expectations. Annual operating profits were £904m in 2007, up from £773m the year before. Fourth-quarter profits rose an impressive 23 per cent to £170m.

This is also good news for investors. International Power's share price has taken a bit of a tumble in recent months; on 31 Oct-ober, it reached 489p, before falling to 361p by 5 March. The fall was due in part to concern about the outlook for the company in 2008 – concern that appears to have been at least partly misplaced. The company's management is bullish on its prospects for this year. Philip Cox, the group's CEO, reckons that despite certain problems that the market is already aware of, for example, that the group will be closing its plant in Rugeley for several months for environmental upgrades, the company has a "very good backdrop" for the year.

And the analysts agree. "We strongly reiterate our outperform recommendation and believe the recent weakness in the share price provides a buying opportunity," said a note from Cazenove. Lehman Brothers backs this view and recommends an overweight position.

Energy markets are notoriously volatile and in merchant markets, sectors in which the power companies are subject to liberal markets, there are concerns. According to Cazenove, power prices in Texas are disappointingly low at the moment. But in the same breath, they say that International Power is diverse enough to withstand difficult regional conditions. Last year's good figures come despite some obvious hiccups; profits in Aust-ralia fell by £42m to £82m. International Power will face other challenges this year but should be in a position to overcome them. Buy.

SVG Capital

Our view: Hold

Share price: 702p (-8.5p)

Private equity firms were described as the masters of the universe last year when they seemed able to pick off target companies at will. Now, some of their bigger ambitions are being scuppered by the credit crunch and the banks are less willing, and less able, to lend them money for new purchases.

But it is a misconception that firms need to be buying new companies every year, argues Nicholas Ferguson, chairman at SVG Capital, the private equity investor, which has investments in a portfolio of companies, including household names like the AA and Bird's Eye. And anyway, he believes the market will be returning to health by the end of the year. The company has 80 per cent of its assets invested in funds managed by private equity firm Permira; a strength, according to analysts at UBS, who say that the buyout group has a good long-term track record and knows how to cope with market cycles.

Moreover, UBS reckons that by investing in SVG Capital, buyers are in effect getting cheap access to Permira's funds without having to pay them a management fee. The analysts also believe it is fine for SVG to work on delivering its existing investments for the time being, but that it should aim to return to buying new companies within the next six to 12 months.

The group's annual pre-tax profits are down 29 per cent to £153.4m, but the companies SVG invests in, such as Hugo Boss and Italian directories business SEAT Pagine Gialle, have generally performed well recently. Hold.

Bulgarian Land Development

Our view: Hold

Share price: 73.5p (unchanged)

An Englishman's home is his castle, even if it's in Bulgaria, such is the trend in British buyers seeking overseas property in recent years. About 300,000 Britons have second homes overseas and, at least until recently, an increasing number have been looking to Bulgaria as a decent location. Bulgarian Land Development has 15 years experience of prop-erty development in the country. The company is confident that despite Brit-ish buyers now thinking twice about investing overseas due to worries about whether property is a good buy, it has enough demand from other areas, particularly from the old Soviet bloc, to sustain it.

The group says its property prices are increasing at rapid rates in Bulgaria, suggesting its developments are now worth €1,000 a square metre; a 28 per cent rise in residential property prices in 2007. And because of investments and maturing projects, the firm expects to make a profit in 2008, up from a pre-tax loss of £187,000 last year and £1.03m loss the year before.

The market for second homes in Europe is still precarious but some analysts believe equity investors would be well advised to hold on to their stock in Bulgarian Land Development, even if that means selling shares in similar companies. Hold.

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