US Edition Cape
190p +7¾
Questor says BUY
The most difficult decision in investing is not when or what to buy – it's when to sell.
The decision is even harder when you are faced with a real winner. Should you hold on for more or be satisfied with the profits you already have?
This is the – fortunate – position we now find ourselves in with oil and mining services group Cape. With the potential for market falls in the coming months, a number of readers have asked whether now is the right time to bank profits in the shares – which are now an impressive 190pc ahead of their initial recommendation price.
On balance, Questor thinks not, although cautious investors may wish to sell some shares as a hedge against future uncertainty.
Cape shares were tipped at 65½p in March and have now come off highs after hitting 230p a share. This degree of profit taking is hardly surprising after such a strong run.
Questor remains confident on the group's future. It has been making good progress on drawing down its debt and, in its last update, Cape said that strong cash generation in the first half had seen further falls in its net debt position from the £165m reported at the end of last year.
We will find out exactly how much debt has been drawn down when the group issues its interim statement on September 16.
With the company's confident tone in the trading update progress should be good.
The rebound in the oil price is also likely to boost the group's medium-term prospects. Oil companies, Cape's major customers, will be prepared to commit to future spending because they are now confident about their future cash flows.
Much has also been said about the difficult trading environment in Cape's Australian business. However, it should be remembered that Australia is a long-term strategic play for Cape – and one that Questor reckons will reap real dividends in the future.
The company is building up a position in liquefied natural gas (LNG) services. This is a wise move. Australian LNG will be vital in servicing Asia's future energy needs – as was recently demonstrated by the massive gas deals recently signed with China and India.
Two weeks ago, a joint venture by Chevron, Shell and
ExxonMobil signed a record $41bn (£25.2bn) contract with Chinese giant PetroChina and another worth $21bn with India's Petronet for long-term gas supply. BG Group is also heavily investing in Australian LNG, so there will be plenty of opportunities to win contracts in the next few years. However, business in Australia is likely to be tough for some time and the pick-up will be relatively gradual.
Investing in the stock market is part science and part art, but it should be governed by logic. The market was right to fret over Cape's debt when the world was imploding, but investors now need to look to the future.
The shares are trading on a December 2009 earnings multiple of just 5.8 times – and this falls to a miserly 4.8 when 2011 forecasts are used.
Even after such large gains, Questor feels shares in Cape remain a buy – but they are unlikely to repeat their performance over the last six months, which has been truly stunning.
Nervous investors should sell half their holding and run with the gains but, based on the long-term outlook for Cape's market and the lowly valuation, Questor maintains a buy stance on the shares.
Diageo
968½ +6p
Questor says BUY
Given the market backdrop, spirits group Diageo turned in a good performance last year. Despite one of the most challenging periods in recent history, the company managed to increase its operating profits, although volumes fell by 3pc.
In the 12-month period to the end of June, sales climbed 15pc to £9.3bn, with the bulk of this down to currency effects. Indeed, the weak pound added more than £1bn to the sales figure over the year.
Pre-tax profits slipped to £2.02bn from £2.09bn, partly as a result of £166m of costs linked to restructuring. The results were in line with market expectations.
When Questor made the original recommendation it was argued that management would have scope to raise the dividend payout further – and this has proved to be the case.
The group upped the final dividend by 5pc to 22.2p, giving a total payout for the year of 36.1p.
The final payment will be made on October 19 and this represents the lion's share of the annual
payout. You can still buy the shares to lock in this dividend if you purchase before September 9, the ex-dividend date. The shares are now yielding 4pc.
The current financial year is unlikely to be hit by significant destocking, although it may be too early to see its customers restocking. However, its markets are likely to improve.
The shares were recommended on June 26 at 822½p and are up 10pc since that time.
They are trading on a June 2010 earnings multiple of 13.4 times, falling to 12.4 next year. Diageo shares remain a buy, although they may mark time for a while after recent strong gains. Also, Questor is expecting a pull-back in the FTSE 100 over the next month or so – and Diageo will not be immune to these market moves. However, long-term prospects are good and investors should regard any falls as a buying opportunity.