The Investment Column: The future looks sweeter for Tate after its annus horribilis
Thursday 03 April 2008
Our view: Hold for now
Share price: 543.5p (+2p)
Investors with shares in the sugar producer Tate & Lyle will have been pleased to see the back of 2007. Last September, the firm issued a profits warning, which knocked more than 100 points off its stock price. Now it insists it has turned the corner and that 2008 will represent 12 months of stability for the company.
Well, maybe. It is true that management appears to have steadied the ship with most analysts saying earnings are on target after the group issued a trading statement yesterday: second-half pre-tax profits are set to be similar to the firm's first half takings of £177m. The numbers are unveiled on 22 May.
But there are other concerns. The firm makes almost 80 per cent of its earnings in dollars, according to the group's finance director, John Nicholas, and that has to be a worry given the weak dollar. Analysts at Panmure Gordon point to Tate & Lyle's debt, which exceeds £1bn, saying this is such a concern the group is recommending its clients to sell the stock.
Mr Nicholas counters this by noting all the group's debt maturity has been extended and that it was refinanced at good terms last year, before the start of the credit crunch, which led banks to push up their lending rates. A risk the firm cannot control is the price of the commodities it uses in its production process, such as wheat.
But there are good things about the group, too. After the annus horribilis in 2007, most analysts have ceased to be worried about the company; ABN Amro says the firm is now "steady as she goes," and Citigroup reckons yesterday's update contains "no surprises". The group has pledged to spend more time and money addressing investor relations.
There are other reasons for investors to be encouraged. The US investment firm Harbinger has built up a 15 per cent stake in the group, even if their motives are unclear, and the company itself has been buying back shares. However, they stopped doing this in February when the stock reached £5. Hold for now.
Our view: Hold
Share price: 1,414p (-54p)
The privatised utilities generally get a pretty bad press, and, in the case of the water group Severn Trent, it has been justified in recent years.
The company has failed in its leakage targets for the past three years and is facing an Ofwat investigation into a misstatement of customer relations data. The group is awaiting its punishment for both indiscretions.
In fairness to the company, they take all this on the chin. Peter Gavan, the director of external affairs, says, while the problems represent an unwelcome "weight", they are at the same time "legacy issues of the past."
While Mr Gavan expects the problems to be resolved some time this year, others are not so sure. Analysts at HSBC, who advise clients to remain underweight on Severn Trent, reckon "operationally, it is looking much stronger in leakage and customer service, and has recovered from the operational disruption caused by the summer floods", but believe the litigation issues could stretch into next year, creating uncertainty for investors.
Once the company rids itself of the outstanding prosecutions, it should be able to turn a corner. Water companies will start negotiating charges with Ofwat for the 2010-2015 period in the next 12 months or so and most are expecting the regulators to recommend an increase in infrastructure spending, the cost for which the water companies will be able to pass on to their customers.
The sooner Severn Trent is able to clear the decks and get on with its business of delivering clean water and taking away the dirty water, the better for investors. And after several years of woe, analysts at Merrill Lynch say: "We believe this retreat has exposed once more an attractive entry level ... notwithstanding its outstanding regulatory issues." Investors may opt to wait to see how bad the punishments are. Hold.
Our view: Buy
Share price: 86.6p (-1.4p)
What a year 2007 was for the Russian steel group Evraz. It announced its numbers yesterday, showing a 55.7 per cent increase in net profits to $2.14bn (£1.1bn). The global steel market has enjoyed a bumper 12 months off the back of demand for commodities, such as iron ore, rising by 50 million tons.
"Demand for steel products is growing amid capacity constraints and structurally limited supply in some regions," the chief executiveAlexander Frolov, said in the statement. "As a consequence, steel products prices are strong."
The firm is not sitting in its laurels, and predicts revenues to increase by 60 to 65 per cent in the first half of this year.
Evraz's strategy is acquisition with the firm shelling out last year for Oregon Steel Mills in the US, two South African mines and the 50 per cent it did not already own in the Siberian coal miner Yuzhkuzbassugol. To finance this, the group is one of the most active in the debt markets. With the cost of borrowing having soared since the onset of the credit crisis, future attempts to refinance the debt will be more expensive.
Investors should also consider the political risk of buying into Russian companies and should not readily forget the fate of Yukos. Buy.
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