Another 5 non-FTSE100 stocks

Monday, 22nd October 2012 15:46 - by David Harbage

As promised, more on individual stocks

On 11 October’s blog we featured five medium or smaller companies which were tagged as ‘interesting’. The writer describes them as such because they represent potential beneficiaries of specific favoured themes: anticipated strength in London housing, demand for budget airlines and the worth of oil. It is important to apply a clear layer of discrimination within an industry to ensure that the individual business model is robust – with some sectors being more homogenous than others. While natural resources such as oil might have appeal, notably for the scarcity value of its assets, the call on these upstream operators was based on special factors led by confidence in the management firstly, and the exploration geography second.   

Continuing our search beyond the FTSE100

The intelligent reader will possess their own views about what is happening – and, more pertinently, what is changing - in the world, and closer to home, in the economy and society. Identifying secular and structural developments early, before they become obvious to the market (or wider world of investors), and then deciding who the most likely ‘winners’ and ‘losers’ of such change might be, is key to capturing that ‘early mover advantage’ when share prices have yet to reflect the scenario the seer anticipates. After selecting the companies, it is important to be rigorous in assessing the equity valuation to ensure that the prospect is financially sound (can afford to respond to a pickup in demand, via expansion or otherwise) or the stock price has not already incorporated a lot of the hope and become expensive.   

A preference for overseas businesses

Although fully listed companies outside of the FTSE100 tend to incorporate more domestic exposure, most of the selections below unashamedly favour non-UK revenue and profits. However, the relative health of the UK or global economy has not been a prime driver; rather, stock selection has followed the above mentioned principle of identifying an idea and then finding a suitable company stock which appears capable of capturing that theme. Please remember that these are relatively small businesses, which may not be as well researched and monitored by professional analysts, and as such represent higher risk-reward investments. They are not recommendations, are probably not suitable for most investors and should only form the starting point for further investigation.

Interesting smaller UK equities

Medusa Mining –this Anglo-Australian company possesses a significant gold mine and exploration projects in the Philippines. Gold has appeal for its traditional ‘store of value’, as well as an alternative currency and investment asset, at a time when leading central banks are printing paper money and interest rates are depressed. The company’s merits surround a very low cost of production, relatively low risk location (political and business-friendly regime) and self-funded exploration/production plan. The latter surrounds a move from 100,000 to 400,000 ozs by June 2016, with extraction costs barely rising to US$230 per ounce, and without recourse to debt finance. While rare bad weather and a focus on extending shaft infrastructure has hampered production over the past year, recently granted government environmental permits keeps progress on track.  Finally, beyond gold, the group has also discovered copper which may become subject of a separate trade sale. The consensus views of equity industry analysts (7 rate the shares as a Buy, 2 consider it as a Hold and none say Sell) anticipate:

For investors looking at other non-FTSE100 sized gold mining companies, with a full listing on the London stock exchange, the prime differentiator and risk hurdle would seem to surround the location of their assets (in terms of political, business regime, tax take-friendly, labour relations, natural geography). The following may be worthy of investigation:

Centamin – operates a mine in the eastern desert of Egypt (a prolific producer in ancient times) and has four exploration projects in northern Ethiopia. 700km south of Cairo, Egypt’s Sukari mine began extraction in 2009, producing 200,000 ozs in 2011 and a development programme targeting 500,000 ozs per annum by 2017. Management anticipate 250,000 ozs in the current year, with a US$550 per ounce cost of extraction which could rise to $700 if current subsidies were withdrawn. Debt-free (as at 30 June 2012 the company had cash assets of US$183 million), the projected mine expansion and other exploration developments can be self-funded. Management estimate a mine life of 18 years, based on proven & probable gold reserves on 10 million ounces. Drilling results are expected at the first of the Ethiopian sites later this year. Capitalised at £1.15 billion, the consensus views of equity analysts (currently 12 rate the shares as a Buy, 5 consider it as a Hold and none say Sell) anticipate:

Petropavlovsk – previously known as Peter Hambros Mining (after its founder chairman), the company is one of the leading gold producers in Russia, with four mines located in the country’s far eastern region. Having delivered production growth every year since listing in 2002, the group is targeting a further 10% hike in volume - to 700,000 ozs - in 2012. Costs of extraction vary across the mines, are US$740 per ounce overall, but are due to fall over the next year having introduced new efficiencies at it prime Pioneer mine and reached capacity at its newest mine, Albyn. As at 30 June 2012, net debt was US$1.056 billion, an increase of $251 million over the previous six months, as a significant exploration programme added a further 1 million ozs to take proven & probable gold reserves up to 10.05 million. Unlike Medusa and Centamin, the group hedges some of its production – a policy which has typically cost it 5% of revenue over the past two years. Capitalised at £800 million, the consensus views of analysts (currently 11 rate the shares as a Buy, 4 consider it as a Hold and 3 say Sell) anticipate:

Telford Homes – an AIM listed builder of apartments in east and north London, this is a much smaller - less well-researched and therefore higher risk-reward - company than the Berkeley Group (mentioned in the earlier blog on 11 October), but represents another potential beneficiary of a strong housing market in the capital. Ahead of interim results in November, a trading update of the half year to 30 September announced on Monday show exceptional promise with completions doubling (to 252), operating margins improving and profit guidance for the year to 31 March 2014 being raised. The timing of transactions on big developments can distort cash flows and earnings, but underlying demand from both domestic and overseas investors – occupiers and prospective landlords – appears to show no sign of diminishing. Buoyed by recent publicity afforded by the Olympics, London’s detachment from the remainder of the domestic housing market appears set to continue. Over the half year to 30 September net debt had fallen from £54.6 million to £31.9 million and the group extended its bank loan facility from £70 million to £90 million to facilitate funding all of its existing schemes and acquire new sites over the next few years. Capitalised at £70 million, the limited number of analysts proffering a view (2 rate the shares a Buy, 1 consider it a Hold and 0 say Sell) anticipate:

Kentz – describes itself as a global engineering specialist solutions provider, and essentially provides contracting, construction and technical support services to oil, gas, petrochemical and mining businesses. Operating in 29 countries, revenue arises primarily – and in approximate equal proportions - from Africa, Australasia and the Middle East. The business is characterised by a large potential order book (backlog increased from US$1.6 billion to $2.5 billion over the past year to 30 June 2012, relatively low profit margins (up from 5.9% a year ago to 7.3%) and a strong balance sheet (net cash rose from $177 million to $240 million over the past year). Producing an attractive 18% return on capital, the well-regarded management appear capable of maintaining the growth path via a proven ability to win new business, across an ever more geographically diverse customer base, amongst blue chip natural resource companies. Capitalised at £500 million, but not well-covered by research analysts as the stock only recently moved from an AIM listing, the consensus forecasts of equity analysts (of whom 5 rate the shares a Buy, 2 consider it a Hold and none say Sell) anticipate:

Monitise – proclaims itself to be ‘the largest Mobile Money specialist in the world’. This technology and service company enables banks, credit card and other financial institutions to offer a wide range of their services via smart phones, tablet (including iPad) and other devices.  Major well-known customers include Visa, HSBC, first direct, Lloyds, RBS, Standard Chartered and Travelex, and this British company’s reach is extending overseas, notably the US (powers mobile banking for one-third of the top 50 US banks) and Asia (Hong Kong, India, Indonesia). However this relatively small business is still in start-up mode, and some way off becoming profitable. Revenue has doubled for the past three years, and is set to double again – to £70 million, in the year to 30 June 2013, according to management – gross margins are close to 70% and the order book exceeds £270 million. The group’s cash balance of £19.6 million can fund circa 18 months development (capital expenditure of £10.8 million last year), but further finance (£22.4 million equity placing in August 2012 was comfortably oversubscribed) will be required to achieve the plan. There are four equity analysts covering the stock, including Barclays and Goldman Sachs, all with Buy recommendations but – given the likelihood of further corporate actions (joint ventures and acquisitions), consensus estimates of future numbers (almost certainly featuring losses in the current year) are rendered inappropriate.

Good hunting in your search for interesting investment opportunities, the companies which own such products or services, appear to have potential via a proven management team and possess the necessary finance to execute the plan.