Business World

Tuesday 18 June 2019

From palm oil to shale gas – six UK equity tips that look likely to give a positive 2013

Garry White

WHAT will happen in the next 12 months is difficult to predict. The US "fiscal cliff" seems to have been largely averted but the eurozone sovereign debt issues will never be far away.

However, 2013 is likely to be a positive year for equities as investors look for yield and bond markets overheat.

These six tips are all London-listed companies that look likely to benefit, although there is a degree of risk, especially in the commodity plays. But commodity markets will have a better year this year as China ramps up its infrastructure spending and fears of a disintegration of the euro recede.

MP Evans 485p

MP Evans runs palm oil plantations in Indonesia. Palm oil prices have been falling but cannot keep going down for long. Crude palm oil futures are currently quoting below $800 a tonne, compared with $950 a tonne in August because of record inventories in Malaysia.

Prices are likely to be supported by fears of tightening vegetable oil markets. Soybean planting looks as if it could be delayed because of excessive rain in Argentina and palm oil is already looking relatively cheap compared with oil from soybeans.

The continuing US drought has also raised questions over 2013 production of soybeans. This commodity was Morgan Stanley's second pick in its performance predictions for 2013, with only gold seen as outperforming. This should boost demand for palm oil as a cheaper alternative.

Evans expects to have produced 300,000 tonnes in 2012, rising to 500,000 tonnes by 2015, as its plants mature.

Evans also has a stake in an Australian cattle breeding operation, owning a significant amount of land.

The 2013 earnings multiple is 12.1, falling to 11.8, and the prospective yield is 1.3pc.

London Mining 145p

London Mining produces iron ore from its Marampa mine in Sierra Leone and is developing two other iron ore mines in Saudi Arabia and Greenland. The company also has a coking coal operation in Colombia, so all of its output focuses on the feedstocks for steel.

Iron ore prices are rallying sharply after hitting a three-year low in September and the price of London Mining has not rallied in step. China received 65pc of all global iron ore shipments and concerns about a slowdown dampened prices earlier in the year. However, Credit Suisse expected China's steel output will rise 6pc this year.

Management have recently been wading in to buy shares. In mid-December Graeme Hossie, its chief executive, spent almost £185,000 buying 150,000 shares, Dr Colin Knight, its chairman, spent £40,000 buying 35,000 shares and Sir Nicholas Bonsor, deputy chairman, spent £20,000 buying 15,300 shares.

The company has a 2012 production target of 1.5 million tonnes of iron ore but plans to expand annual output to 5 million tonnes equivalent later this year. A second plant is expected to be completed in the next few months increasing annual capacity to about 3.6 million tonnes.

Currently unprofitable, the company is expected to post its first profits in 2013 and is on an earnings multiple of 4 falling to just 2.8 in 2013.

Heritage Oil 190.3p

Heritage Oil has gone through a transformation this year. It has exited from Kurdistan, where progress on the country's first oil industry legislation has been slow and where it would have faced expensive exploration and developments obligations. Its focus has now moved to Nigeria, where it will soon have production from its purchase of the OML 30 licence from Shell. On Monday, Heritage's Nigerian partner in OML 30, Shoreline Power Company, exercised its option to buy 30pc of the joint venture. Heritage should get $100m (£61.5m) this month.

OML 30 produced 35,704 barrels of oil equivalent per day (boepd) in November with 15,665 barrels net for Heritage. This gave revenues of $52m for the month.

Heritage also has assets in Russia and Malta. It is one-third owned by its chief executive, Tony Buckingham.

The current year earnings multiple is 13.4 falling to 6.4 in 2014. This could be a transformational year for Heritage.

Melrose Ind. 226.3p

Melrose Industries was punished after it issued a conservative outlook in November. This looks like an overreaction and the shares have partially recovered since then. Melrose is a turnaround group that employs a private equity-like model to buy underperforming industrial companies.

The last one it bought was German group Elster, which makes smart meters. Management have an impressive track record and analysts commented that the funding of Elster was conservative. However, net debt stands at £306.5m following the deal.

Trading on a 2013 multiple of 13.2, the yield is 3.4pc. The shares are a continuing recovery play.

Capita 755p

Austerity means outsourcing – and Capita is likely to benefit as a result.

The country's largest outsourcing group is likely to return to organic growth of about 3pc when it announces its 2012 results but 2013 should be even better. Like-for-like growth could be as strong as 6pc. This represents strong turnaround from 2011 when organic growth fell by 7pc.

In 2012 margins are likely to be 45 basis points lower but the fall is due to additional costs associated with acquisitions and the start-up of new contracts. The fall is a sign the group has won contracts and is bedding in new business. It is not a "structural" problem that investors should be concerned about.

There is a pipeline of bids worth £3.1bn over the next six months and any wins would lead to upgrades.

The shares are trading on a 2013 earnings multiple of 13.5 compared with its previous 16 when in a growth phase.

San Leon Energy 8.9p

Probably the most speculative of all the 2013 tips, £100m capitalised group San Leon Energy is currently in the process of merging with £50m Aurelian Oil and Gas in an all-share deal.

Both companies are involved in shale gas exploration and their combination means San Leon will hold the largest amount of exploration acreage in Poland, where shale gas prospects look good. It has assets across Europe and North Africa.

Aurelian had €51.4m (£42m) on its balance sheet at its last interim results, so the merger brings in cash to fund the explorations programme.

Successful drilling could lead to a significant re-rating for the shares. However, the group is likely to be loss-making for many years and investors should see this as a relatively risky investment. (©Daily Telegraph, London)

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