Twelve tips good and true
Who will be the star performers in 1997? Last year our pundits backed the sublime and the ridiculous. Here they go again
Sunday 05 January 1997
Of course, the usual health warning applies. The tips are an ad hoc selection and in no sense constitute a balanced portfolio.
If it ain't broke, don't fix it. The approach, that is. So after Trafalgar House last year, I am again looking for hulks still not sufficiently bombed out to attract top dollar. I toyed with Sherwood Group, the lace maker, which had a terrible 1996 but is fundamentally sound. There is institutional unrest, which may lead to new management or a bid. Chairman David Parker, however, has a 30 per cent stake and may be hard to persuade.
So I am going instead for DIY group Wickes. The shares are due to be relisted on Tuesday after its pounds 53m rescue rights issue. At 15p, that has been priced low to ensure a take-up and analysts expect the stock to open at 20-25p. That compares badly with the 69p suspension price following discovery of a huge accounting fraud last June, but will provide a benchmark for a bid. RMC and Kingfisher have already been sniffing and the housing market recovery offers an attractive backdrop for a deal.
There has been plenty of interest in Flextech (681p), the cable and satellite TV programme supplier, following the growing hype over digital and pay-per-view television. The company does have real merit; a recent digital deal with the BBC gives it access to the BBC's strong back catalogue, and Flextech also has established interests in The Children's Channel, UK Gold, Bravo and Playboy TV.
The shares are not cheap, especially as it has yet to make any profits, but there are hopes Flextech's total profits could explode to more than pounds 200m by 1999. An interesting speculative punt.
Value is going to be hard to find this year in the tail of a bull market, and particularly rare in oil exploration shares. They had a bumper 1996 on the back of high oil prices and takeover activity. But Premier Oil (36.5p) may prove there's more life in the sector yet. Its recent purchase of Discovery Petroleum gives it exploration and production in Western Australia and Indonesia to add to its holdings in Pakistan and the North Sea. Last year Premier paid its first dividend and it has outlined an aggressive growth strategy. Yet the shares have not taken off, partly because of Amerada Hess's blocking 25 per cent stake. A standstill agreement on that holding expires in February, allowing it either to launch a full bid or sell out to a predator.
In an election year after a heady market, any investment has to be risky. So for my punt, I'm going for strong management. On this criterion, you could do worse than Siebe - a world-class British engineering company.
Siebe may not give you huge returns - though the past year has seen the stock rise steadily from 751p to a high of 1,082p now - but it is unlikely to let you down. With a string of strong acquisitions under its belt and Allen Yurko installed as the successor to Barrie Stephens at the top, Siebe looks set to benefit from clear thinking and formidable products.
It's been quite a year for First Choice, Britain's third largest tour operator after Thomson and Airtours. A new chief executive in Peter Long and a pretty dismal set of full-year figures ended the Francis Baron era. Profits of pounds 10m in 1996 were a lot better than the pounds 1m after the disastrous summer of 1995 when the whole industry was plagued by overcapacity and slashed prices. But they still represent a pathetic return on sales of more than pounds 1bn. The challenge is to translate that 1 per cent return into something closer to the industry best of 5 per cent or so. It might take a couple of years, but the prospect makes the shares (73.5p) attractive. Bookings are well up on last year and the City at last believes there is a firm hand on the tiller. First Choice is not as good a quality stock as Airtours but it has great recovery potential this year.
Riding on the coat-tails of such digital TV hopefuls as Rupert Murdoch's BSkyB, the set-top box maker Pace Microtechnology had a splendid run in the second half of 1996, its first few months as a quoted company. But there is plenty of room for growth in 1997, too, not least from the demand for digital receiving equipment once the 200-channel revolution is truly upon us.
To date, Pace has relied on overseas to fuel its rise, with 80 per cent of its revenues generated from outside the UK. It shipped 500,000 digital boxes last year, with the US, Asia and Europe all contributing a share.
The company pointed out in its pathfinder prospectus that its business plan included no estimates at all for the UK digital market. So everything that comes its way will be a lovely fillip. Pace is already on BSkyB's shortlist for at least 150,000 boxes in 1997, and more contracts are in the offing. Still a buy at 228p.
Ronson, devastated by a fire at its Tyneside factory, should, with rights issue cash under its belt, start to claw its way back. Shares of the maker of luxury goods are bombed out but could be ignoring recovery prospects. At 26.5p they have moved from their 20p low but, when former funeral director Howard Hodgson, moved in, nudged 70p.
Mr Hodgson alighted on what was the old Hoskins Brewery (since sold) when he sought a shell to develop a luxury goods group. But his plans to develop Ronson into an international brand with strong representation in the duty free market were hit when his main production centre went up in flames.
As long as the company avoids further accidents, the Hodgson ambition may be realised.
I'm tipping NatWest Group chiefly for what it hasn't done rather than for what it has. The temptation to blow the pounds 2.4bn proceeds from the sale of NatWest Bancorp, its US retail basket case, must have been intense. The share price languished accordingly at a 40 per cent discount to its UK rivals.
Now it has bought investment banking boutiques Hambro Magan and Gleacher, the market no longer has to worry about a massive, potentially disastrous bid for the likes of Lehman Bros. Revenues were ahead of target last year, cost control remains tight, and bad debts look subdued. NatWest now has a clearly defined strategy and there seems no reason why it should do any worse than its rivals, which means the shares (695p) should end the year at between 800p and 900p.
ICI is quite a risky stock to select as part of a New Year portfolio that demands dramatic share price improvement over the year. For while it has a rock-solid dividend and admirable defensive qualities, it has not outperformed in recent years.
Those industry and economic factors beyond its control, which contributed to a disappointing 1996, however, should be more benevolent in 1997, making profit forecasts of pounds 750m now look rather conservative.
Operationally, ICI's management does not disappoint. Its "value gap" savings programme will yield more tangible benefits this year and there will be news of more to come. More intriguing prospects for the shares (769p) may be found in how chief executive Charles Miller Smith participates in the shake-up of the global chemicals industry.
ICI could fund an acquisition of up to pounds 5bn without needing to tap shareholders. If this is the year that ICI chooses to make its move, the shares could motor.
Two areas that ought to do well in 1997 are property and shopping, but finding a decent retail-orientated property group whose shares have not already soared is tough. Nonetheless, investors might still take a look at Chesterfield Properties.
The group has been a bit of a dog in recent years, but that could change since the arrival of Robert Maxted in November. Mr Maxted, best known for building up the successful Pillar Property Investments, reversed in his own private Albion property group and brought in heavyweight investors including Nigel Wray's Burford and Legal & General.
The gearing remains high, but Mr Maxted is already starting to shake- up the portfolio. The shares, at 565p, still probably below net asset value, could start to motor.
Hambros could be a simple one-way bet for 1997 - especially if vulture fund Regent Pacific has its way. It set the cat among the pigeons last year by snapping up a 3 per cent stake.
While that helped drive Hambros to a new high, its shares (at 238p) are well below their peak.
Regent aside, Hambros could be propelled higher by a strong performance from Hambro Countrywide, the estate agency in which it has a 52 per cent holding, if the mini-housing boom continues. The traditional merchant banking operation is performing well, too.
The story is also about management. Sir Chips Keswick has pledged to turn the bank around after a strategic review. If he delivers, the shares should climb. If not, a bidder may pounce.
Hanson (85.5p) may have ended up winning the Cruft's prize for share Dog of the Year in 1996, but I believe only the timing, not the fundamentals, was wrong. OK, the dividend is still uncovered, the demerger failed to restore shareholder enthusiasm, the residual business is unfashionable, and the ageing Lord Hanson seems to have lost his nose for deals. But the assets are surely now undervalued, and the current market value of just over pounds 4bn may make the takeover king a potential target in 1997.
How we fared: our 1996 share tips
Tipper Share 1 Jan 1996 31 Dec 1996 Change
Paul Rodgers Stagecoach 343.5p* 699p +103.5%
Patrick Tooher Cantab Pharmaceuticals 340p 665p +95.6%
Paul Farrelly Trafalgar House 27.75p 50p** +80.2%
Steve Lodge Pet City 382p 594p** +55.5%
Derek Pain Allied Leisure 42p 59.5p +41.7%
Mathew Horsman Capital Radio 533p 546.5p +2.5%
Roger Trapp Groupe Chez Gerard 217p 222.5p +2.5%
Russell Hotten Amec 94p 92.5p -1.6%
Patrick Hosking GUS 685p 612p -10.7%
Magnus Grimond British Gas 254p 224.5 -11.6%
Nigel Cope Storehouse 332p 258p -28.7%
Clifford German Hanson 120p* 81.5p -32.1%
John Shepherd Saltire 120p* 66.5p -44.6%
Tom Stevenson Self Sealing Systems 54p 29.5p -45.4%
Average increase 14.8%
FT All-Share Index increase 11.6%
Outperformed the market by 27.6%
*After adjustment for rights issue (Stagecoach), demerger (Hanson), one- for-10 consolidation (Saltire).
**Price at which company was taken over.
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