Investment Column: Randgold has the resources to shine

Flybe; Costain

Edited,Nikhil Kumar
Friday 06 May 2011 00:00

Our view: Buy

Share price: 4,900p (-73p)

The last time we looked at Randgold we reasoned that it deserved to be backed for its long-term prospects. Besides, the shares had lost ground ahead of its update last summer, and we spied what looked like a good time to buy in to the gold miner – and so it was, until the end of the year, when the share price began to fall back.

It continued falling and in March, it slipped below the 4,500p mark. Today, Randgold trades at 4,900p apiece, leaving it below the levels seen last summer, but well ahead of recent lows.

Despite the pullback – which we would attribute to jitters about the political situation in Ivory Coast, where Randgold operates – we continue to believe that the stock will trade higher in due course.

Our confidence is down to the ongoing rise in production, with the miner expecting to produce 750,000 to 790,000 ounces of gold this year. That equates to an increase of more than 70 per cent on last year.

Costs have been a persistent sticking point for some market watchers, and yesterday's first-quarter results did indeed show that total cash costs stood at $744 per ounce, up 19 per cent from year ago. But they were down from the levels seen in the final three months of 2010. Moreover, the chief executive, Mark Bristow, is still focused on beating the $600 per ounce estimate for the year.

Investors should also keep an eye on the gold price. It continues to rise, and though headlines hailing all-time highs have become all too common, it is worth remembering that gold is still well below its real-terms peak. Further gains should continue to support gold-related stocks.

Finally, we would highlight the valuation, which, at 1.6 times net asset values, according to Numis, is hardly prohibitive. At spot gold prices, that multiple falls to 1.1 times, according to Canaccord Genuity.


Our view: Sell

Share price: 172.5p (-57.5p)

The budget airline Flybe made its market debut at 295p in December,but its shares nosedived well below 200p yesterday after a dire trading update that contained two profitdowngrades.

The group, which focuses on internal UK flights, estimated its pre-tax profits came in at £22m for the year to 31 March, a shortfall of about £2m on City forecasts. The airline said that while its business passenger traffic, which accounts for 45 per cent of its customers, had proved "very resilient", the UK market remained "extremely challenging". It also said that the slowdown in consumer spending had hit passenger numbers in February and March.

In its defence, Flybe increased its total seats flown by 4.5 per cent to 2.6m in the fourth quarter. It grew passenger yields by 10.5 per cent, which led to revenue per seat rising by 2.2 per cent to £46.14, despite a 4.4 per cent reduction in load factor.

But it warned on the outlook and a greater exposure to higher fuel prices this winter, although hedging will provide it with more protection in the first half. The airline now expects profits for 2011/12 at the same level as the previous year, which is £15m short of joint house broker Investec's £37m forecast. While potential investors may take comfort in Flybe's modest forward earnings ratio of 7.6 and its objective to expand across continental Europe, its reliance on the still fragile UK economy makes us think that this calamitous flotation remains fraught with risk, and may suffer further turbulence in the months ahead.


Our view: Buy

Share price: 227p (-2p)

The engineering and construction company Costain looks like it's in pretty solid shape despite recent market turmoil, with yesterday's update showing that it had secured £850m in revenues for 2011.

Management said it is "continuing to perform well and trading in line with the board's expectations". Back in April, it expanded its operations with the acquisition of ClerkMaxwell, which supports companies in the oil and gas sector, in a deal worth £3.2m. Costain has also secured "significant new contract awards" since the beginning of the year, lifting the order book to £2.3bn.

Moreover, the group has more than £100m in cash on the balance sheet and no significant borrowings to speak of. In other words, the picture looks rather rosy. That, coupled with an affordable forward-earnings multiple of under 9 times, makes this a stock worth buying, in our view.

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