Investment Column: If you can stomach it, Vedanta is a good buy

Serco; Carpetright

Edited,James Moore,Deputy Business Editor
Wednesday 30 June 2010 00:00 BST

Our view: Buy

Share price: 2168p (-129p)

If there were a "nasty company of the year" award, the FTSE-100 listed mining group Vedanta Resources would not be short of nominations. It is not going overboard to say that the company has an awful public image.

Human rights and environmental activists consistently attack Vedanta for its practices, not least its bauxite project in the Niyamgiri hills of Orissa state in eastern India. Local tribes argue that if the government in Delhi gives the proposed mine a green light, their way of life will be lost forever. But media reports yesterday suggested that the project had won approval from the Prime Minister's office, and a rubber stamp was only three weeks away.

Investors tend to be uncomfortable answering questions about Vedanta's record, especially as its previous backers, including the Church of England and the Norwegian state pension fund, have sold out on ethical grounds. But – and it's a big but – whatever the truth about Vedanta's practices (one analyst recently said the company "couldn't care less" about its image), it has been a great stock to hold. The shares have put on more than 70 per cent in the past 12 year, which for a FTSE 100 company is a remarkable performance.

Regardless of the objections, the Orissa project is likely to go ahead and, for the not very squeamish, confirmation of this should lead to a further jump in Vedanta's share price. The stock has dipped in recent weeks, largely amid renewed concerns about global demand, but we see the falls as only temporary. Despite the jump in the stock in recent months, we would regard the multiple of 5.3 times forecast 2011 earnings as undemanding.

The lukewarm dividend yield of 1.5 per cent is irrelevant when compared with the performance of the shares. Many people will, and have, dismissed Vedanta on ethical grounds, but this is a share-tipping column and investors will make money from the mining group, so buy if you can stomach it.


Our view: Take profits

Share price: 603p (-20.5p)

Serco has a lot to recommend it. The support services group's wide portfolio, covering everything from Australian prisons to Royal Navy tug boats, gives it considerable strength. And recent contract wins to run the Dubai metro and help Britain's unemployed back to work have helped to underpin its performance and keep the group on track for strong revenue growth in 2010.

That was the conclusion of a pre-close trading update yesterday. Even better, Serco is forecasting a rosy future as cash-strapped governments turn increasingly to outsourcers to help deliver their public services. "The opportunities we see to improve productivity and achieve significant efficiencies for them in the delivery of frontline essential services, across both existing and new markets, continue to give us confidence in our prospects for the future," yesterday's bullish statement said.

But despite everything, we are not convinced. Serco's stock has already risen by almost £1 this year, and current prices are way above previous highs of 508p (in the run-up to the financial crisis in 2008). Add to that a pricey forward multiple of 18.9 times Panmure Gordon's estimate of this year's earnings and it could well be time to book gains and seek better value elsewhere in the services sector. Take profits.


Our view: Take Profits

Share price: 640p (-70p)

There are good reasons why the long-term prospects for Carpetright look rosy. First, the floor coverings retailer dominates its sector and has benefited from the travails at its main rival, Allied Carpets.

Carpetright, which has 567 stores and concessions in the UK, also benefits from the diversity of having shops in Belgium and the Netherlands, and an insurance replacement business on these shores.

Furthermore, Carpetright will be a major beneficiary when UK mortgage approvals eventually return to their historical norm of about 90,000 a month (there were just 50,000 in May). Yesterday, Carpetright showed it was in fine fettle by reporting that its underlying pre-tax profits for the year to 1 May had risen by 64 per cent to £28.2m.

However, the major stain on Carpetright is its lofty valuation. Despite hefty selling yesterday, the shares still trade on a forecast 2011 multiple of 15.6 times, which puts it at a premium to the sector. The outlook for consumer spending over the next year is also unlikely to be pretty, although Carpetright will try to shelter itself from cuts by offering certain public sector workers, such as police officers and prison wardens, a 10 per cent discount.

For those with a long-term view, few retail shares look better but Carpetright is too pricey, so take profits.

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