Midas Extra share tips: Soco International (SIA), James Fisher (FSJ)
Stock markets have been jittery this week, alternately hopeful that recovery is around the corner and worried that it may take until well into next year before conditions improve. Today concerns moved to Asia, particularly China.
The People's Republic seems to have experienced a rapid turnaround since the winter but economists and brokers are sceptical about the reliability of official government data and the sustainability of recovery, given that much of it seems to relate to a massive $580 billion stimulus package.
What happens in China has a massive impact on the rest of the world so worries about its economy hit the London market today and the FTSE opened down. Sentiment was further affected by news from the Bank of England that suggested Governor Mervyn King remains concerned about the economic climate in Britain too.
Such bouts of nervousness are likely to be a stock market feature until the economic outlook becomes a lot clearer. But, for investors, these times can provide interesting buying opportunities.
Soco International
Epic: SIA
Soco International, for example, is an oil exploration and production company. Initially an Aim tiddler, it is now in the FTSE 250 index, valued at nearly £1 billion.
The company has come a long way over the past decade. Ten years ago, it achieved sales of $23 million and profits of just over $7 million. This year, sales are expected to be $230 million and profits are forecast at more than $85 million.
Like most other oil companies, Soco reports in dollars. Unlike many oil companies, it delivered record half-year figures for the six months to June. Soco does not just produce some oil and look for more. The company tends to develop fields and sell them, using the proceeds to fund further exploration elsewhere. Last year, it sold wells in Yemen to the Chinese for $350 million dollars. The sale was made as oil neared record highs and it has left Soco with nearly $300 million of cash to help finance current and future projects.
Soco's current production is focused on Vietnam, where it is already taking 6000 barrels a day out of the ground. But the company is prospecting for more in Vietnam and the Congo, not the Democratic Republic, which is rather unstable, but Brazzaville, capital of the neighbouring Republic of Congo, which is generally considered rather less risky.
The Vietnam fields are particularly interesting for brokers. Two years ago, chief executive Ed Story, disappointed investors when he said Soco had made some exciting discoveries in Vietnam only to admit a while later that a combination of bad luck and bad drilling techniques meant the wells failed to deliver on their promises. Now Soco is trying again, hoping to have learned from its mistakes. Investors will not know for sure until next year but Story suggests the minimum find will be 100 million barrels and the maximum could be up to one billion.
The Brazzaville site offers significant potential as well and initial results from drilling tests are expected by the end of the summer.
Soco benefits too from the arrival only this week of Mike Watts, deputy chief executive of FTSE 100 oil company Cairn Energy. This should prove particularly reassuring to brokers and investors who were frustrated by Soco's failings in Vietnam two years ago.
Midas verdict: Soco is expected to deliver net profits a near tripling of pre-tax profits this year to $95 million, rising to $130 million in 2010. A big leap is forecast in 2011, only two years away, by which time the company should be producing way more oil than now and delivering profits of more than $250 million. Soco does not currently pay dividends, preferring to invest its income in the business, but the shares are widely expected to deliver strong capital growth over the coming three years. The stock is priced at £12.62 and analysts believe it is worth at least £16 over the next year and significantly more after that, particularly if prospects in Vietnam and Brazzaville prove positive. The arrival of Watts is extremely encouraging and there is always the possibility of bid action, particularly next year. Buy.
Update: James Fisher
Epic: FSJ
Back in March, Midas Extra recommended James Fisher, a specialist engineering company that tries to provide services that other companies cannot. The shares were 329p in the spring. Today they are 518p, a rise of 57 per cent.
Fisher was founded in Barrow-in-Furness in 1847 and is still based in the Cumbrian seaport. The company used to focus on shipbuilding but, in recent years, it has transformed itself into a world leader in marine services. As such, it provides highly technical, specialised expertise to customers ranging from the Ministry of Defence to Shell and from ExxonMobil to the Singaporean navy. The company is a world leader in a number of fields. It makes outsized fenders for massive oil rigs and ships; it designs and supplies systems that help ships test whether their rigging works under strain, it has a submarine rescue business and it is involved in nuclear decommissioning.
Earlier this week, Fisher announced it was buying MB Faber, a Leyland-based engineering group which specialises in nuclear and aerospace services. The purchase was only small - £5.25 million up front and another £1.25 million next year if 2009 earnings are more than £1.2 million - but brokers were encouraged by the deal. First, Faber fits neatly with James Fisher's existing decommissioning business, bringing 120 specialist engineers into the company and doubling its nuclear workforce. Second, it indicates that Fisher is confident enough about the future to undertake expansion plans.
Midas verdict: James Fisher reports interim figures next Tuesday and these should give a clearer indication of the company's prospects. Investors will not lose out by selling some shares at current prices but, if news next week is upbeat, the stock should continue to rise. Bear in mind too that these shares were well over 600p at the beginning of 2008. Investors should hold on to at least half their stock.
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