Upbeat Elementis results see its stock rally

By Graeme Dickson
Updated: 12:22 EDT, 9 March 2011

The FTSE 100 index managed to add 44 points from last Wednesday to close yesterday at 5974, following steadying oil prices, albeit at almost 29 month highs, while positive US job numbers managed to lift spirits.

Last Thursday, the European Central Bank left interest rates on hold at one per cent despite concerns about spiralling oil, commodity and food prices.

However, the markets' rallied following news that the Arab League are considering proposals to stop the fighting in Libya, which sent oil prices modestly down.

Despite the intentions of the Arab League, the proposals could not come soon enough as Libyan in-fighting continued into Friday, pushing oil prices back up again with Brent Crude up three US dollars.

US Non-Farm Payroll figures came in much better than expected, but the rising oil price put a dampener on initial excitement that the world's biggest economy is staging a strong recovery.

On Monday, US light crude which has been trading at a $10-$20 dollar discount to Brent crude over the last few months, started to narrow the discount with a rise to $106 a barrel following murmurs that the civil unrest in North Africa may spread into Saudi Arabia.

Additionally there was negative comment from the president of the Federal Reserve Bank of Dallas, Richard Fisher, about the effectiveness of the US Federal Reserve's Quantitative Easing programme, causing US markets to fall.

Yesterday oil prices retreated a bit following increased oil production from Saudi Arabia and other nations.

Looking at the stock markets per se, there is an understandable fixation with the price of oil almost overshadowing any decent piece of good economic news.

While this continues it is likely that the markets will remain with limited upside. On the business channel CNBC last week an oil analyst came on air and said that the fundamental price adjusted for inflation should be circa $85.00 a barrel, so his argument is that anything on top is down to speculators driving the price on the grounds of fear.

If the Arab League or any other proposal can simmer down the Middle East/North African tensions, then one can assume there is likely to be a healthy correction to the oil price, which will likely be read as positive by the markets.

In the meantime watch out for resistance on the FTSE 100 at 6100 and support at 5860.

Big mover: How you can profit

Last week was an excellent one for speciality chemicals group Elementis (ELM) with shares rising 22.4 per cent since last Wednesday to close yesterday at 157.5p.

The stock is rallying following last week's very upbeat results with the company's flagship sector, its Specialty Products business performing very well.

It benefitted from a number of initiatives, including the growing popularity of shale gas drilling, in which Elementis's products allow its customers to drill faster, further and more efficiently.

The shares are currently trading on a price to earnings ratio of 15.7 with a dividend yield of 2.1 per cent.

Net debt has fallen from $106.3 million (£65.8 million) to $79.3 million (£49.1 million), which is becoming increasingly insignificant as the company grows (market cap currently stands at £706 million).

The chemicals industry is one of the few sectors that have escaped the recent turmoil seen in the markets over the last month.

Elementis is now benefitting from being ensconced in strong themes such as China and US shale gas exploration, while its restructuring programme for its Chromium division in 2009 is now starting to bear fruit.

As such I expect the upward rerating to continue, with the occasion pull-back along the way.

Keep an eye on…

Up-market estate agent Savills (SVS), which is scheduled to release its preliminary results on Thursday 17 March.

In November, Savills issued a trading statement saying that it expects underlying pre-tax profit for the full year to be in excess of £40 million with the UK and Asia Pacific businesses continuing to outperform, despite widespread talk of a 'bubble' in property prices in China.

The company has already flagged up that the volumes for the fourth quarter of 2010 will be lower than that recorded in 2009.

Additionally, its UK Commercial Transaction Advisory business showed third quarter revenue up over 60 per cent ahead of the same period last year and anticipated that this would have continued into the fourth quarter of 2010.

Savills is expected to generate earnings per share of 24.05p according to a consensus forecast between analysts at Numis and The Royal Bank of Scotland.

Dividend per share is expected to grow to 10.64p, giving a potential yield of 2.7 per cent.

The company is also in the great position of having no debt and in a net cash position of £20.1 million.

Overall the company is in good shape although this is not a value play given its elevated forecast price to earnings ratio of 16 times – about par for Savills given its history on the stock market over the last 17 years.

Expect resistance at 400p with any correction to be supported at the 200 week exponential moving average at 335p.

Highlights from the FTSE 350 over the last week:

• On Thursday PartyGaming (PRTY) rallied 9.14 per cent to 191p after reporting that earnings before interest, tax, depreciation and amortisation for 2010 rose to £100.4 million from £93.2 million in the previous year.

• Forth Ports (FPT) added 6.53 per cent to 1523p last Friday on rumours that 30 per cent shareholder Peel will make a move for the company following its failed bid of 1400p last year.

• Also on the rumour front, Home Retail (HOME), owners of Homebase and Argos, added 1.4 per cent to 211.8p on age-old talk that it was being stalked by a potential predator.

• Satellite operator Inmarsat (ISAT) plunged 13.37 per cent on Monday to 593p after it warned that the maritime industry was starting to favour email as a method of communication over voice data, thereby stunting growth.

• The Forth Ports rumour on Friday was partially confirmed on Monday, with a 1630p cash bid this time from Arcus (formerly Babcock & Brown) and not Peel Holdings as initially murmured.

• Yesterday Heritage Oil (HOIL) added 1.78 per cent to 282p on talk that it has been approached possibly by one of its partners of its Nabucco pipeline, for a takeover.

• On a negative note set-top box maker Pace (PACE), plunged 20 per cent to 176.4p after announcing a £19 million one-off cost will dent profits, thanks to a previous acquisition.