US Edition Hochschild Mining
284.2p
Questor says BUY
QUESTOR remains bullish on precious metals, despite news last week that demand for gold has reached a six-year low. Traditional gold- buying countries such as India and Turkey are not buying jewellery as the price is high at a time when the recession is biting.
However, when you look at investment, gold buying has gone through the roof, with demand from people seeking a store of value rising 46pc year-on-year in the second quarter. Even central banks appear to be having a relapse of the gold bug. In the second quarter, central banks were net buyers of the metal for the first time since 2000, according to the World Gold Council.
Investment in precious metals depends on economic conditions. One important driver of the price is the US dollar. When the dollar is weak, precious metals are a good hedge against the falling currency. They also offer protection from inflation.
The amount of money currently being printed in the US is ultimately a bearish sign for the dollar. On Friday, Nobel Prize-winning economist and Columbia University economics professor Joseph Stiglitz said that the US currency had a lot of risk associated with it.
"There is a need for a global reserve system," said Mr Stiglitz. "The dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there's a high degree of risk."
Silver also has many industrial uses as well as being a value store. That is one big advantage over gold. In effect, silver straddles the gap between being an industrial metal and a precious metal. So, if the dollar should weaken, the outlook for the silver price is positive. An upturn in industrial production should also boost demand for the metal.
Hochschild Mining is a South American silver miner – and its interim results last week were good, particularly on the cost-cutting front. The company even managed to pay a small dividend that was ahead of expectations – a rare event in the mining sector at the moment.
Despite a 22pc fall in the price of silver year-on-year, revenues were flat as production increased by 17pc. The group also managed to slash its administrative costs by 34pc and its unit cost of producing one tonne of silver by 10pc. There should be more cost savings to come. However, although a falling dollar should boost the silver price, it is also likely to have a negative effect on costs
Precious metals miners are always highly rated – and this is certainly the case with Hochschild. The shares are trading on a December 2009 earnings multiple of 36.9 but this falls to 16.5 next year, which is much more reasonable. Although the group is paying a dividend, the yield is minimal at 0.4pc. This is a play on the rising price of silver over the medium term. The shares are a buy.
Jardine Lloyd Thompson
468.3p
Questor says BUY
JARDINE Lloyd Thompson (JLT) occupies a curious position on the London Stock Exchange as the only listed insurance broker.
With rivals like Towergate and Heath Lambert unlikely to pursue a listing any time soon, there is no peer group with which to compare.
Last month, the company saw first-half profits rise 15pc to £61.3m and maintained its interim dividend at 8.5p a share.
Dominic Burke, JLT's chief executive, is bullish about the group's future, having overseen its restructure since joining in 2005. This included selling its US business and growing its London market and retail divisions.
JLT is an acquisitive company and bought nine companies last year at a combined cost of £29m. Bolt-on purchases remain in the company's sights and are likely to spur the group during the months ahead.
Despite this, organic growth remains its core strategy, boosted by ongoing recruits from some of its larger US rivals.
Questor made a buy recommendation in March at 424¼p. Since then, the group's share price has remained steady and it has benefited from rising insurance premiums in some of its markets, including energy, property and catastrophe risks.
With rival Benfield being taken over by Aon last year, there are also hopes that JLT could itself become a bid candidate – although no potential acquirer has so far emerged. However, shares should never be bought on bid hopes alone. Questor maintains buy stance on the shares, which are trading on a December 2009 earnings multiple of 13.5 times and yielding 4.4pc.
Tesco
369.6p
Questor says BUY
Questor has avoided investing in UK banks over the last year – but has recommended putting your money in Tesco shares. Now Tesco has gone one step further – it wants you to put your money in its very own bank.
Last week, the supermarket group said it would create 800 new jobs by opening a banking call centre in Glasgow. The vastly-expanded financial services division is trying to capitalise on the current distrust of UK banks and capitalise on its strong brand and store network. It looks like a canny move.
Tesco Bank, as it will be known, could launch Tesco current accounts by the fourth quarter of next year – and then start providing mortgages. Tesco Personal Finance was launched in 1997 as a 50-50 joint venture with Royal Bank of Scotland. Tesco bought out RBS last summer for £950m.
This news is an example of why Questor prefers an investment in Tesco over J Sainbury. Tesco offers significant international exposure in growth markets and dynamically moves into new markets such as banking. Sainbury is merely a UK supermarket group.
Despite Tesco offering a growth profile unrivalled in the UK supermarket groups, it is the lowest rated.
Morrison shares are trading on a January 2010 earnings multiple of 13.6 times, with Sainsbury on a March 2010 multiple of 14.1 times – but Tesco's shares are sitting at a prospective February 2010 multiple of just 12.4. Questor feels this discount is unwarranted.
One advantage Sainsbury shares have over Tesco is the yield. Tesco shares are yielding 3.5pc, but Sainsbury shares are trading on a prospective payout of 4.5pc. Morrison shares are yielding a mere 2.7pc.
The shares were first recommended at 329¾p in December and they are now 11pc ahead of the recommendation price. Buy.