US Edition Vedanta
£14.41 -5p
Questor says HOLD
In emergent economies, which have growing populations that are becoming more wealthy, the future energy gap is significant. There is a structural shortage of power that needs to be filled. That's why Vedanta's fund-raising to strengthen the balance sheet of one of its subsidiaries looks like a canny move.
Vedanta owns 61.7pc of an Indian company called Sterlite Industries. It is the country's largest copper producer, but it also generates a significant amount of energy to power its own mining and refining operations. The unit plans to raise $1.5bn (£914m) by selling shares in the US to fund its power generation plans and make acquisitions.
Sterlite wants to increase its power generation capacity so it can sell the excess into the country's grid system.
About $500m of the shares will be bought by Vedanta itself, but there will be dilution – and Vedanta's stake in Sterlite will fall to 57.3pc.
On balance, this looks like a sacrifice worth making if the company can make strategic purchases of distressed energy assets. The group has the funds for this transaction after recently issuing a $1.25bn convertible bond.
However, it does seem counter-intuitive to the company's long-term plan to tidy up its structure by buying out minority interests and consolidating all of its separate units on to one balance sheet. This is the only real criticism that can be levelled at the transaction - but the reason for the fund-raising is sound.
The plan is to take on major players in India's energy market such as Reliance Industries. The country lacks sufficient domestic energy resources and must import much of its growing energy requirements. This has to change.
The country's economic growth over the next years will be staggering compared with the pedestrian growth in the West. According to the Indian government, 30pc of India's total energy needs are met through imports of oil, coal and gas, but the country also has a severe shortage of power stations.
The country has more than 15pc of the world's population, but it is only the sixth-largest oil consumer in the world. This will certainly change over the next 10 years and power use will jump significantly as people become richer. This always leads to more consumption.
Vedanta shares were recommended on December 4 at 543p and the shares are now up an impressive 140pc. The stance on the shares, which are yielding 1.5pc, remains hold because of future growth prospects, but the shares look reasonably valued for now.
Mothercare
539p +7p
Questor says BUY
As expected, overseas growth at Mothercare was very, very strong, underscoring the significance of the group's growth plans.
International retail sales in the 15 weeks to July 10 rose an impressive 32.7pc, boosted by sterling's weakness, resulting in total group sales rising 9.4pc. Underlying growth in the international division excluding currency movements was probably more like 20pc.
The shares have had a strong run and are up 20pc since their recommendation at 49½p on May 27.
The shares edged back a little after yesterday's first-quarter update, which is hardly surprising after their strong run. They may pause for breath now because much of the good news is priced in. However, Questor is maintaining a long-term buy stance on the shares, which are yielding 2.9pc, because of Mothercare's international ambitions.
The shares are trading on a March 2010 earnings multiple of 16 times, which is high. However, with such solid growth prospects the premium rating of this company is deserved.
Petrofac
730½p +36½p
Questor says BUY
The news from oil service group Petrofac keeps getting better and better, with yet another substantial contract win unveiled yesterday.
The shares hit a 12-month high yesterday after the company said it and its partners had secured a $2.1bn contract to build a natural-gas-to-liquids (NGL) train in Abu Dhabi. Petrofac share of the contract was $1bn.
An NGL trains converts gases such as methane into longer length hydrocarbon molecules such as ethane, propane and butane, which can be transported in liquid form. This is useful where gas pipelines do not exist and the condensate can then be transported via sea to wherever it is needed.
Demonstrating the continuing strength of the Middle Eastern oil market, Petrofac appears to have more than doubled its order backlog in the first half of this year. Analysts have calculated it now stands at $8bn to $10bn.
This is the first contract won by a new joint venture the group has set up called Petrofac Emirates with Mubadala Petroleum Services. The venture is split 50:50 between the two groups and it was set up in November.
Petrofac Emirates offers a full range of engineering, design, procurement and construction services for onshore oil and gas, refining and petrochemical projects throughout the United Arab Emirates.
The shares are trading on a December 2009 earnings multiple of 13.1, falling to 9.9 next year. The shares are yielding 2.5pc and the stance remains buy.