Something old and something new from City professionals
Thursday 02 January 1997
As ever, there were widely varying performances. Bernard Clark at the renamed Hill Samuel Asset Management emerges as the clear winner with Sema, the computer services group, which more than doubled. After being runner-up last time he receives a well-deserved bottle of fizzy drink.
Also worthy of more than honourable mention is Colin McLean of Scottish Value Management, who justified his faith in recovery stocks by tipping Scholl. As predicted, new management has done wonders for the shares, which are up over 50 per cent on the year.
Philip Winston of BZWIM, part of the mighty Barclays empire, also proved a consistent outperformer. His choice of Trinity International, the rapidly- expanding newspaper group, showed a healthy 35 per cent gain although that was not enough for him to retain last year's top spot.
At the other end of the scale, the failure, again, of the conglomerate sector to spark into life proved the undoing of Mike Grimble of Norwich Union, who tipped BTR, and Vanessa James of Legal & General, whose choice was Tomkins.
They are joined in this year's more limited entry by some other old faces, along with a smattering of new competitors.
Hill Samuel AM
The UK equity market is short of genuinely advanced technology share issues, so there were few surprises amongst the experts when shares in nuclear specialists AEA Technology quickly raced up from their 280p flotation price last year to the current 396p. No further nuclear power stations are planned for the UK, but there will still be considerable work to be done on de-commissioning old and obsolete plants, particularly overseas. Even so, the company expects future growth will come mainly from non-nuclear products and outsourcing services to industry, ranging from robots to software. The current share price seems high enough for the present, but by the end of 1997 margins should be moving up rapidly as the effect of re-structuring fades. By then, a market capitalisation to sales ratio of 1.5 will be more appropriate, giving a price target of 550p.
Scottish Value Management
With many of 1996's trends set to continue in the coming year, I believe growth businesses will still be at a premium. My share for 1997 - Cairn Energy, the oil and gas exploration and production company - has already been a winner over the past 12 months. However, while it starts 1997 at higher levels, good underlying asset progress means that the shares are still cheap.
Drilling success in 1996 has turned Cairn into a substantial independent oil company. Its recent takeover of Command Petroleum of Australia, which operates in India, adds to its attractions. Capitalised at around pounds 500m, with the shares at 417p, Cairn could even attract a bid itself, in a sector where I expect more corporate activity in the coming year.
It is time to relight that fire at British Gas. Following a near 50 per cent underperformance over the last two years, the three key issues which have dogged the company during this period are close to resolution. Firstly, the recent deal with BP to settle some of BG's loss-making "take-or-pay" contracts is an extremely positive move, establishing a base level for the liabilities at around pounds 2bn.
Secondly, February's division of the company into two constituent parts should enable the undervaluation of the oil exploration division, which is as big as Lasmo and Enterprise combined, to be corrected. Finally, the Monopolies and Mergers Commission investigation into the last regulatory review should be resolved by 13 April. A favourable outcome could theoretically be worth pounds 2bn to British Gas. The shares at 224.5p are a buy for the brave.
SkyePharma, the new vehicle of Ian Gowrie-Smith of Medeva fame, is a small company with expertise in drug delivery technology. As a result, it offers the growth potential of a pharmaceutical company, with lower risk, as the customers are the drug companies which have already taken the commercial risk of identifying new compounds. Skye currently has relationships with more than a dozen international drugs companies, including SmithKline, Roche, Eli Lilly and Bristol Myers. Its clients benefit from product differentiation and more flexible dosing, which also attracts doctors and patients. In return Skye receives royalty payments of 3-5 per cent. The shares are currently 73.5p.
Where return goes, so does risk. What promised to be a good year for equity and bond markets was put into jeopardy in December 1996 as equity investors found that high returns bring high risks. However, the bulls won in the end.
We expect more volatility in the equity and bond markets in 1997. Investors who are less risk tolerant might consider commercial property, through the medium of an authorised property unit trust, such as Barclays Unicorn, recently recorded at a mid-price of 257.6p.
Royal Sun Alliance IM
George Simpson has only been managing director at GEC for a few weeks but he has realised that urgent action is needed. His four main aims are to improve the strategic focus, address the cash mountain, change to a more customer-facing culture and concentrate the development spend to improve the growth rate. The first two objectives should bring immediate benefits. Despite the challenge of how to deal with the consolidation of the European defence industry, the bull case for GEC lies in this corporate restructuring. All this upside can be bought for a market rating at the recent price of 382p, making the stock a convincing buy.
Making money in 1997 is not going to be easy. I expect to see a lot of volatility with the impending election and decisions about EMU later in the year. However, the stock market background is really quite good and I am going for Sainsbury, currently out of favour with just about everyone. Profit forecasts have been cut again since the interims in November and the share price has performed very poorly in the last few years. It used to be thought of as the Rolls-Royce of the food retail industry, but now everyone thinks it has lost its way.
Well, I like Sainsbury. The underlying consumer climate is good and the do-it-yourself business should do well next year. The share price discounts a lot of bad news and gives an above average yield. It is a turnaround story with a danger that they will continue to lose market share, but I think it is basically a good operation and they will get it right again. Worth buying at 388p.
Legal & General
The case for British Aerospace rests both on fundamentals and its pivotal position at the heart of the possible rationalisation of the European defence industry. The company has shown itself able to control its finances and there are few concerns over its dependence on the Saudi Al Yamamah contract. The company has established itself as a system integrator and prime contractor with excellent profits and dividend growth potential. Meanwhile, the recent McDonnell Douglas-Boeing merger has removed one commercial aircraft manufacturer. The airlines will now have a strong incentive to support a viable competitor to Boeing.
Arjo Wiggins 165p 179p +8.5%
British Biotech 178p 205.5p +15%
BTR 329p 284p -14%
Eidos 693p 722.5p +4.3%
GEC 355p 382p +7.6%
IMI 328.5p 375.5p +14%
Scholl 194p 298.5p +54%
Sema 536p 1.085p +102%
Tomkins 282p 268.5p -4.8%
Trinity International 342p 462.5p +35%
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