Investment Column: Anglo American can be a win-win punt

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Our view: Buy

Share price: 2285p (+9p)

Since July, those holding Anglo American shares have been treated like stock market royalty. The company's management, led by the new chairman Sir John Parker, has promised Anglo investors the very earth he has been travelling around to see them all, on the condition that they told Xstrata to take a hike with regard to its nil premium, merger of equals, approach. And although plenty of Anglo's backers saw the rationale for the deal, the fact that Sir John got his way means that now it is payback time.

Anglo has been something of a laggard in the mining sector in the last few years, and Xstrata's approach was partly built on the wholly accurate assumption that the company could be made a leaner, meaner operation.

Cynthia Carroll, Anglo's much-criticised chief executive, knows that avoiding Xstrata's proposal was a close shave, and that she now has just 12 months to act. The group announced a raft of welcome changes yesterday, included the divestment of a number of businesses and a restructuring of its senior management team, which it reckons will save in the region of $120m a year. That, coupled with a reasonably upbeat production report (despite platinum output falling by 9.9 per cent) is encouraging news and suggests that the company is on the right track.

But if it all goes wrong, with Anglo's plans getting buried deep in one of its mines?

Well, Xstrata is now bound by Takeover Panel rules preventing it making another offer for Anglo for six months. It is licking its wounds, but knows that it has to buy or merge with a better-diversified mining company before swings in the commodity cycle put pressure on earnings.

Anglo remains its top target. Any hint of underperformance and it will move. Anglo's institutional investors will not be as prepared to listen to Sir John next time around. "We reiterate our buy," say Evolution's analysts, based on a multiple of 12.4 times 2010 forecast earnings (yielding 1 per cent).

We agree. Whichever way this goes, investors should win.

Smiths News

Our view: Buy

Share price: 926p (-6.5p)

Henry William Smith first set off on his newspaper round using horse and carts in 1792. Two centuries later Smiths News is the UK's leading wholesaler of magazines and papers.

The group, which was part of the newsagent WH Smith until its split into an independent company three years ago, yesterday revealed that pre-tax profits had fallen 44 per cent to £18.4m. Yet management, analysts and the City didn't seem particularly perturbed.

Mark Cashmore, chief executive, pointed out that revenues had actually improved 6.9 per cent over the year to £1.3bn, and the profit declines were a result of one-off charges.

The group has benefited from the troubles of its rivals during the credit crunch. The acquisition of the book distributor Bertrams out of Woolworths for £8.6m is already paying off, and the management reckons it could lift margins further with some judicious cutting. It also won new contracts, and Mr Cashmore believes the group is "well-positioned for growth".

By taking on business from Dawson, which went into administration this year, the group has increased market share and papered over the cracks of the decline in newspaper and magazine sales during the downturn.

The market remains tough and confidence is low, but sales are beginning to pick up.

The group is on a 5.9 per cent yield as it upped the dividend yesterday. It trades on 8.9 times forecast earnings, according to Altium Securities, and those earnings look to be relatively secure. Buy.

Sceptre Leisure

Our view: Buy, but only after debt deal

Share price: 76p (+0.5p)

Can anyone really buy into a company linked to the pub trade with any confidence? With more closing every week and severe headwinds coming from both the economy and likely tighter regulation of alcohol, one would think not. But Sceptre Leisure could be an exception.

The company supplies fruit machines, lottery tickets and other games (dartboards, pool tables) to pubs. In a relatively unconsolidated industry with some disarray among competitors, Sceptre is in a good place and is growing quickly.

Its debt levels are a worry – net debt of £21m is nearly twice its market capitalisation, and talks are ongoing with banks about new financing. Another difficulty is its relatively small free float – management holds 85 per cent – but again that should be addressed because the company has said it is looking to do deals and will raise cash through issuing equity to do them. Trading on 18 times next year's earnings (according to Edison) it's not cheap. If it can resolve its issues, Sceptre is a decent bet. Buy when it does.