Midas Extra archive: February

By Joanne Hart for The Mail on Sunday
Updated: 03:27 EDT, 24 April 2008

Financial Mail on Sunday's respected share-tipping column, Midas, has been running Midweek Midas Extra since January 2008. It is available to readers who sign up (only an email required) and is sent out every Wednesday. It also contains a trading report from Graeme Dickson, including a summary of the crucial economic figures that might move shares in the next week ahead and tips on strategies...

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To help you keep an eye on the share selections, we are now publishing the archive online. Here are the February selections...

27 February 2008

Dechra Pharmaceuticals
Epic: DPH

For the first time in weeks, there have been tentative signs of life in the stockmarket. The FTSE 100 has been trading above 6000 and a number of banks have reported better than expected results.

It is still far too soon to break open the Champagne, however. Economic data remains mixed and the outlook is highly unpredictable: defensive stocks are likely therefore to remain in favour for some time.

Ultimately, every company has some exposure to the ups and downs of the economy but some are more vulnerable than others. Defensive businesses are those which are less sensitive to the external environment - and a classic example of the breed is Dechra Pharmaceuticals.

Dechra makes and sells drugs for pets. The company has been an independent business for ten years and floated on the Stock Exchange in 2002. Since then, it has gone from strength to strength. The group comprises two main divisions: Dechra Services sells other companies' drugs to vets across the UK; Dechra Pharmaceuticals makes its own drugs and sells them in Britain, Continental Europe and the US.

Dechra traditionally focused on the Services business and this is cash-generative, solid and reliable. But the Pharmaceuticals subsidiary is considered the real jewel in the crown going forward. The division was only created a few years ago but profit margins are much higher because the drugs that it sells are being manufactured in-house. This means that even though Pharmaceuticals is responsible for 20% of Dechra's revenues, it is soon expected to deliver 60% of the profits.

The British love their pets, as we all know, and they are living longer thanks to better food and better drugs. In fact, we spend £500m year on treatments for our cats and dogs. The Europeans spend about £2bn a year and the Americans spend around £5bn annually.

Dechra Services has a 44% share of the UK market but the Pharmaceuticals business has a market share of less than 3% - so there is masses of potential.

Most animal drugs are made by big pharmaceutical companies such as GlaxoSmithKline or Schering but they tend to focus their energies on finding the next blockbuster product. This leaves plenty of room for companies such as Dechra to develop niche products and it already has two pretty smart ones on the market - Vetoryl and Felimazole.

Vetoryl treats dog tumours and Felimazole treats cats with over-active thyroids. Both conditions are fairly common and Dechra is selling the drugs across Europe. The company is also expected soon to be licensed to sell these treatments in the US and this could boost revenues by up to 10%.

Figures published this week showed a 25% rise in pre-tax profits to £7.4m, a 12% increase in revenues to £141m and a 10% hike in the dividend to 2.75p for the six months to 31 December.

Chief executive Ian Page has spent his adult life in the veterinary drugs business, starting out as a warehouse worker and moving up the ranks to his present position. Over the past five years, he has doubled Dechra's operating profits and would like to do the same again.

Midas verdict: Dechra shares are trading at 397p and have weathered the recent market storm better than most. Analysts believe the company is worth at least 450p and could also become a takeover target within the next couple of years. Buy.

Speedy Hire
Epic: SDY

Our second stock is Speedy Hire, which has suffered badly over the past few months. The shares were trading at more than 1300p last summer and have since fallen back to just 858p. The decline reflects fears that Speedy Hire will be hard hit by any slackening in the UK economy. The company rents out equipment to construction groups and some brokers have been concerned that Speedy is exposed to the rather depressed housing and retail markets. But this is not quite true.

Earlier this month, chief executive Steve Corcoran explicitly said the company is barely involved in these two sectors. He also expressed confidence in the future and said trading had begun well in 2008. In fact, revenues between September and December rose an impressive 43% compared to the previous year.

Last year, Speedy bought Hewden Tools and that business has already been bedded down on time and on budget. Analysts expect the acquisition to deliver £20m of synergies on an annual basis and the deal has also consolidated Speedy's position as the market leader in the tool hire business.

Speedy's main customers are construction groups, such as Balfour Beatty or Kier Group and it supplies them with a wide range of tools and equipment. These companies have full order books stretching out to 2010 and beyond so there is plenty of demand for Speedy's products.

Speedy also supplies smaller plumbing and electrical businesses and here too, there is strong demand. Hiring tools from an operator such as Speedy tends to be cheaper than buying lots of different bits and pieces, especially in recent years. Health and safety regulations have become increasingly onerous and Speedy's kit is state-of-the-art and ticks all the right boxes.

Midas verdict: Speedy is a well-run business that deserves a re-rating. City analysts really like this business and expect it to deliver double-digit profits growth over the next three years. The shares should start to reflect these forecasts. Buy.

20 February 2008

Dawson Holdings
Epic: DWSN

This is a busy week for the financial markets. The bank reporting season gets underway in earnest so investors will find out whether the clearers have been lending prudently or throwing money around and investing in lost causes. Early signs are a little better than the most pessimistic observers expected but the full picture will not become apparent until early next month.

In the meantime, shares were given a boost as Barclays' delivered a robust dividend increase and sources close to Lloyds TSB said it would almost certainly follow suit. Dividends can provide investors with a great deal of comfort, particularly during periods of economic uncertainty and one stock that fits this particular bill is Dawson Holdings.

The company has a long tradition of rewarding shareholders, dating back to a time when it was extremely successful and highly profitable. There have been some leaner periods in recent years but Dawson has continued to deliver generous dividends and expects to continue this policy indefinitely.

The group has four strings to its bow. The biggest division is Dawson News, which distributes newspapers and magazines to retailers in South East England, the West country, Wales and the Midlands. This business operates more than 900 vehicles and delivers over abn copies of papers and periodicals to 14,000 retailers. The statistics are impressive but Dawson News has been through a difficult patch over the past couple of years, struggling along with the media industry it serves. Profits fell from £17.4m in 2005 to just £9m last year. Since then however, the company has made strenuous efforts to improve and early signs are encouraging.

Peter Harris was appointed as chief executive in 2006 and Hugh Cawley became finance director last September. The group is now focused on improving productivity at Dawson News and growing the rest of the business.

This includes Dawson Books, which supplies specialist books to universities and other institutions; Dawson Media Direct, which provides airlines with newspapers, magazines, videos and other in-flight entertainment and Dawson Marketing Services, which delivers promotional leaflets and posters to retailers round the country.

Harris is keen to develop the Media Direct and Marketing Services businesses, both of which have huge growth potential. In-flight entertainment is expanding fast and Dawson has been developing this division overseas in places as far afield as India, Japan and Hong Kong. The marketing division is growing too and is building a reputation in the e-commerce sector, helping companies develop promotional material more cost-effectively.

The News business can also be put to much better use. The vans are used intensively at certain times of night, delivering papers round the country, but they are relatively under-used during the day. The company has already begun to find ways of exploiting the situation - delivering upmarket hampers, for instance - but it is exploring such avenues as distributing greeting cards, CDs and stationery to the big supermarket chains.

Earlier this month, Dawson released a trading statement saying it had made good progress in the first four months of its financial year. The group also said profits were so far at the upper end of City expectations, prompting brokers to upgrade their forecasts for the year to this September to more than £10m.

Midas verdict: Dawson shares have been treading water for months and are trading at 97p. But Harris is determined to put this company back on track and in the meantime, investors can take comfort in a dividend yield of almost 8%.

Polo Resources
Epic: PRL

Equity investors are constantly advised not to put all their eggs in one basket. Buying a variety of different shares makes it more likely that success in one area will balance weak performances elsewhere. Bearing this mind, our second recommendation could not be more different from our first. Dawson is high-yielding and has been around for years. Polo Resources joined AIM last summer and is unlikely to pay a dividend for some years to come. What it does intend to do is deliver growth and fast.

The company focuses on exploration and production and has recently acquired 14 coal licences and 18 uranium licences in Mongolia. This may seem like a risky venture a long way away but there is a logic to Polo's strategy. Chinese coal consumption has mushroomed in recent years and demand is likely to remain exceptionally strong for years.

Burning coal may not be environmentally friendly but the fact remains that China needs to fire its power stations and make steel. Only this week, the appetite for steel was underlined when news emerged that steel makers have agreed to pay up to 71% more for iron ore, a key component of the metal.

Coal helps to convert iron ore to steel so it is a vital component in the process. It is also very heavy so transporting it long distances is expensive. This is where Mongolia comes into its own. The country is rich in natural resources, which have so far been under-exploited. But the Mongolian government is keen to attract foreign investment and Polo hopes to take advantage of this development.

The company intends to start producing coal by the end of this year and expects to increase production rapidly over the next two years. Given Mongolia's proximity to China, there is a natural home for the commodity, the price of which is expected to soar this year and next. Some analysts believe coal will virtually double in price, going from $55 a tonne to $100 a tonne by 2009 as demand from Asia intensifies. Polo has also bought 25% of an emerging coal provider in Bangladesh, very near that other Asian powerhouse, India.

Mongolia is not without risk - the government has already said that some coal mines are 'strategically important assets' and cannot be owned outright by foreigners. But none of Polo's assets fall into that category and any abrupt changes in the local laws would meet with fierce opposition from overseas investors. Polo also benefits from an ambitious and experienced management team with a proven track record in the natural resources sector.

Midas verdict: Shares in the company were suspended last November, when the Mongolian licences were acquired, but trading on AIM began again this morning at 11.8p. This is not a stock for widows and orphans but for investors interested in taking a punt, the shares could offer an exciting, and rewarding, ride.

13 February 2008

Portmeirion
Epic: PMP

Six weeks into the New Year and concerns about recession and bad debts continue to dominate the market. Data released this week appeared to show that inflation has been kept under control, which could mean further cuts in the cost of borrowing. This gave stock prices a bit of boost as brokers took the view that cheaper borrowing could help companies across the board. Most economists believe however, that interest rates are unlikely to move much lower in the UK, at least not in the short-term.

Looking ahead, the stockmarket will almost certainly be given a sense of direction as the bank reporting season gets underway. All the big British banks will be announcing their 2007 results over the next few weeks and these figures will include data on how much money they are going to write off because they have lent cash and capital to companies and individuals who cannot repay them. If the sums are bigger than expected, stock prices will suffer. But if they are lower than expected, or banks are upbeat about the future, shares may rebound.

Against that uncertain background, investors need, more than ever, to focus on the longer-term picture. Companies with a clear strategy and clever management should do well and their share prices should ultimately reflect their achievements.

One company that ticks the right boxes is Portmeirion. The group specialises in chinaware but also designs glasses, gifts and other decorative items for the home. Founded in the 1960s by a couple who wanted to create British dinner ware with a difference, Portmeirion has had a chequered history. The company's products have always been a favourite in the US, so it was badly affected by the aftermath of the 9/11 terrorist attacks. Since then however, chief executive Lawrence Bryan has taken the business in hand and it is now firmly back on track.

Portmeirion has a stated aim of increasing turnover by an average of 10% over the next few years but Bryan hopes to exceed that target and the City expects to see a significant increase in profits from £2.9 to £3.3m when the company reports 2007 figures in April.

There is a progressive dividend policy too. The forecast dividend is 14.7p and, with the shares trading at 245p, the stock is yielding almost 6%.

Portmeirion went through a phase of being associated primarily with slightly quaint, slightly old-fashioned plates and dishes. But it is changing fast. A new, much more contemporary design from Sir Terence Conran's daughter Sophie has caught on here and in the US and the company has created some innovative cookware, such as dishes that can go straight from the freezer to the oven - and look good too.

The group supplies a wide variety of store chains, ranging from Woolworths to Harrods, and it does particularly well at John Lewis. In the US, it supplies Macy's, one of the biggest retailers in America and it has a growing presence in Korea, Canada and Italy.

Gift products have recently been added to the range and these are expected to generate demand here and overseas.

Midas verdict: Consumers are expected to spend less this year than in previous years but Portmeirion should be less exposed than many in the retail sector. Its products are reasonably priced, it has a presence in numerous countries and it is popular not just in stores but on the internet too. Bryan is focused, ambitious and determined to succeed. If all goes according to plan, this company should grow significantly over the next five years and the share price should rise. Buy.

Braemar Shipping Services
Epic: BMS

Our second stock is Braemar Shipping Services, a fully-listed company that can trace its roots back to 1842. The company is involved primarily in shipbroking, which covers a wide range of services. Braemar hires out ships to businesses that want to transport commodities such as oil or coal from one part of the world to another; finds cargo for ship-owners; manages ship-building projects and generally ensures that goods make their way safely and cost-effectively around the globe. The group also has two consultancy divisions, one of which advises on how best to deal with disasters such as oil spills and the other of which provides advice around the transport of liquefied natural gas (LNG).

Shipping is rather a volatile sector but conditions have generally been healthy in recent years. This reflects the substantial increase in global trade as China and India have become major players in the export and import markets. Looking forward, there are concerns about the impact of an economic slowdown in the US on the shipping environment but Braemar is optimistic about the future.

The company released a trading update last month saying it expected full year profits to be significantly higher than last year's £11m and that its forward order book is at record levels.

Brokers like this company for that very reason: the orders are there for all to see and they look good. Braemar is also cash-generative so it pays a decent dividend and has a yield of nearly 5.5%.

Midas verdict: At 433p, Braemar shares are trading at less pricey levels than many in the shipping sector. Yet the company is doing well and has exposure to the fast-growing LNG market. Buy.

6 February 2008

Manganese Bronze
Epic: MNGS

The chill in the air has been widely reflected in the stock market this week. As temperatures plunged outside, the mood among brokers and economists remained bleak. America seems to deliver more bad news every day, provoking fears of a full-blown recession on the other side of the Atlantic. In this era of globalisation, America's misfortunes tend to affect the rest of the world. No one is immune, including the thousands of UK companies who do business directly or indirectly with the States.

Nonetheless, as this column has said before, shares should be held for the long term and many stocks have been dragged down to levels that seem wholly unjustified.

Shares in Manganese Bronze, for instance, have tumbled from 950p in the summer to 531p today. The company makes London black cabs and analysts have come to the conclusion that, if the economy slows down, fewer people will be using taxis so cab drivers will be less inclined to invest in new ones. This may be the case but it ignores three very important factors.

First, Manganese Bronze does not just make black cabs, it services them. So even if fewer London cabbies buy new vehicles, they still need to maintain them. The older taxis are, the more maintenance work they require, which makes this division is relatively recession-proof.

Second, London Mayor Ken Livingstone has introduced new laws about diesel emissions, which come into force this July and mean that thousands of cab drivers will either have to upgrade their vehicles or trade them in for new ones.

Third, and most importantly, Manganese Bronze has set up a joint venture with a Chinese company, Geely Automobile Holdings, to make black cabs in China and sell them throughout Asia. The first taxis are scheduled for sale next year and demand is said to be enormous.

Currently, Manganese Bronze makes almost 3000 cabs a year from its headquarters in Coventry. The Chinese site hopes to be able to produce up to 40,000 a year and could even export parts to the UK, thereby reducing the cost of production over here.

London cabs are not cheap - costing around £30,000 but cheaper parts could bring that figure down for cabbies and thereby increase demand in towns across Britain. The Chinese cabs will be a lot cheaper to make and, if the venture is successful, Manganese Bronze has the right to sell them around the world.

There have already been expressions of interest from places as far afield as Africa and Chicago in the USA and fans of the company believe it could be in for a period of explosive growth over the next few years.

The main challenge in the short-term will be to make sure that the cabs produced in China are of the same high standard as those produced in Coventry. Manganese Bronze would suffer terrible reputational damage if the Asian cabs were not up to scratch so there is always a chance that production will be delayed.

Midas verdict: The London black cab is internationally renowned and, if production can be achieved smoothly and cost-effectively in China, Manganese Bronze could see its share price go from strength to strength. Buy and hold.

Bodycote
Epic: BOY

Our second company this week is a specialist engineering group, Bodycote, whose share price has also slumped in the recent market downturn.

Last spring, Bodycote rejected a 332p a share offer from the Swiss company Sulzer. At the time, Bodycote's board said the Sulzer approach significantly undervalued the company. Today shares in Bodycote are trading at just 181p and long-standing investors are probably wishing they had accepted that Swiss bid. But times change and for investors looking at the company now, there are sound reasons for buying some stock.

Bodycote has two main businesses, thermal processing and testing. Thermal processing involves heating metals up in such a way as to make them much stronger than they would otherwise be. The technique is used in a wide range of applications so this division's clients include car-makers, aeroplane manufacturers, rail companies and energy groups.

Testing is also extremely diverse. The business is a world leader and has more than 100 laboratories in 19 countries. It performs tests for drugs companies, food manufacturers, medical groups and engineering businesses and it also carries out environmental work to make sure that sites are asbestos-free or that the soil on which a factory is about to be built is not full of toxins.

Bodycote said in December that 2007 had been a good year with turnover from the thermal processing division up 15% and turnover from testing up 26%. The company also said it was confident about 2008. Customers in the aerospace and energy sectors are continuing to do extremely well and this more than offsets the difficult conditions experienced by its car manufacturing clients in North America.

Midas verdict: Bodycote shares have been savaged because brokers are worried about its exposure to the US market. But the beauty of this company is that it has a wide variety of businesses in a wide variety of regions. It is more defensive therefore than it is given credit for. The share price should bear this out over time. Buy.