The Investment Column: UK Coal offers a joint energy and property play

IP Group; Henry Boot

Alistair Dawber
Friday 29 August 2008 00:00

Our view: Buy

Share view: 433.5p (+7.5p)

For those who thought the UK coalmining industry was finally killed off by Margaret Thatcher back in the 1980s, think again.

FTSE 250-listed UK Coal, the biggest coalminer in the UK, announced yesterday that it had managed only a pre-tax loss of £9.9m in the six months to the 30 June, compared with a profit of a tad over £45m for the same period last year. But no need to worry about that, says the finance director, David Brocksom, who argues that the loss is due to the group moving more production to a deep mine, which takes longer to come on line.

In fairness to Mr Brocksom, others tend to agree. Analysts at the independent broker Landsbanki argue that the full-year projected numbers will be met, and that clients should buy the stock on the prediction that the shares will reach 670p. The market was not unduly concerned either, the shares closing yesterday up 1.8 per cent on the day.

The prognosis looks pretty good for the immediate future. The price of coal has jumped by 45 per cent since the start of the year. Couple this with the fact that the group reckons it will manage to produce 5 million tonnes of coal in the second half, compared with the 3.7 million it mined in the first half of the year, and the case for the group emerges.

On the property side of the group, a Rics valuation said the group's asset were worth £438m, up 5 per cent. This is encouraging news, argue those at Seymour Pierce: "Whilst the near-term outlook for the land and property sectors remains very turbulent, we believe the long-term outlook remains positive, given the shortage of sites available for development in the UK. This is where the potential lies for UK Coal."

With energy prices not looking as if they are going to fall soon, the group's numbers should look increasingly buoyant, and investors should take the chance now to buy at an attractive price. Buy.

IP Group

Our view: Buy

Share view: 107p (+0.25p)

Investors who want to understand what they invest in may have a little trouble with IP Group, which makes it its business to commercialise intellectual property (IP) rights. The group started in 2000 with Oxford University as its sole partner, and now has nineothers on board.

The group specialises in areas such as clean technology and therapeutic pharmaceuticals, investing as much as £8m in new projects each year.

For those still with us, IP Group may make an intriguing investment opportunity. The company issued its interim numbers yesterday, showing that pre-tax profit was down at £15.8m, versus £18m last year. The chief executive, Alan Aubrey, says that investors should not look at the group's numbers on a six-monthly basis, but should instead be paying due attention to the fact that IP Group's net assets have grown from £65m in 2004 to £230m today.

The analysts concur: "The model has matured to a point where it can demonstrate considerable success. The net asset value (NAV) as a proportion of market value is currently increasing rapidly. At the end of 2007 value of the portfolio as a proportion of net cash invested was 6.7 times. More difficult to value are the intangible items such as access to future IP from the university relationships and the other IP agglomeration models... We forecast a NAV of £235m by the end of 2008 (we estimate it is already £225m)," say those at Kaupthing. They add that the clients should buy the stock.

Mr Aubrey claims that the group's biggest success to date is seeing stakes in its top 10 companies grow to about £3m, after a typical initial investment of about £40,000. This is a pretty impressive return, and while investors should not expect overnight success from a punt on IP Group, a longer term investment should pay off. Buy.

Henry Boot

Our view: Sell

Share view: 92.5p (+1p)

Property: Boo, hiss, sell.

There might be a lot of good reasons why investors should buy the property development, construction and investment group Henry Boot. Sadly, the reasons are the same today as they were a year ago, and they have not stopped the share price falling nearly 60 per cent in the past 12 months.

The group's finance director, John Sutcliffe, argues that with a focus on land development and getting planning consent for its sites, current trading remains robust for the group. However, after pre-tax profits fell to £20.4m, from £21.9m a year ago, he does concede that 2009 will be financially tough.

Analysts at the group's own broker, Evolution, said that the shares trade at a 60 per cent discount to a sum-of-all-parts valuation and the stock should be worth 200p. They said it was at a 50 per cent discount back in April, when the shares were trading at 142p, and while Evolution's analysis may be bang on, it does not account for the fact that the wider property sector is toxic and that investors will sell, rather than hold on to a sinking a ship just because it's cheap.

Henry Boot is a well-run group, with a focus on perhaps the most robust part of the property sector, but the shares are going to fall before things get better. Sell.

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