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Graham Ruddick - Barratt Development
Rowena Mason - Royal Dutch Shell
Rupert Neate - Vodafone
James Hall - Mulberry
Amanda Andrews - Informa
Louise Armitstead - Bowleven
On December 22 , Petrofac announced the successful completion of the first phase of a multi-billion dollar gas project in Turkmenistan. It is now starting on the second phase, worth $3.4bn. In that one announcement, the oil and gas services company revealed much about its business model and the reasons it is rightly a darling of FTSE 100 investors.
First, it is involved in multi-billion dollar projects with government-backed oil and gas companies. Second, it completes to time and to budget . Third, its contracts are often phased, with one multi-billion dollar deal leading seemlessly into another. To December 24, Petrofac’s share price rose a princely 56pc in 2010. With a series of major deals in the pipeline, increasing demand from the emerging markets for oil and gas developments and oil prices strong and rising, that upward trajectory is sure to continue.
In its latest statement to the markets, Petrofac said it would be on target to match the $416.3m record profits expected by analysts. Its core engineering and construction operations increased revenues by 50pc in the first half of the year and net profits by 40pc. The figures will be very strong again in 2011.
Domestically and across Africa, central Asia and the Middle East, Petrofac is expanding rapidly. Investors should see smart returns for 2011, just as they have from the previous five years.
Annual share tips are usually made on the basis of a journalist rating the company’s management and its strategic vision. This tip is different. For in this case, it is neither.
Granted, Andrew Moss, Aviva’s chief executive, has done much to rationalise the group and bring a number of disparately named companies under the Aviva brand, but as I commented in Rainmaker back in September, he is in danger of treading water.
The problem I have with Aviva’s strategy is that is not punchy enough nor visionary enough to really propel the company’s shares – and it is for that reason that I am recommending them, on a speculative basis.
Aviva’s US strategy has been left wanting, its European push is strong but not life-changing, and its UK arm is solid but offers low growth potential. Although rival Prudential had a tough year in 2010, at least it was a victim of taking major decisions, not sitting on the sidelines.
If ever there was a need for some form of corporate activity – be it disposals or more preferably some form of investor-pressured merger or takeover – Aviva is it. Buy on that basis.
While much of the City was out on its Christmas break, some positive news from gold miner Avocet Mining slipped under the radar. On December 24, the company said it was on track to dispose of its non strategic South East Asian gold assets for $200m (£130m) – more than one third more than analysts expected the mines would be worth. On completion, this will provide the group with substantial firepower to invest in its West African mines.
Avocet’s most important asset is the Inata mine in Burkina Faso, which it bought in a deal in 2009 through the purchase of Wega Mining. It also has a pipeline of exploration projects.
The company said in November it was on track to “meet or exceed” its full-year production guidance of 220,000 ounces of gold, which is reassuring. Should the sale of the Far East assets go through – and there seems no reason why they shouldn’t – the company would have transformed itself from a high-cost Asian gold producer to a lower cost, more focused African play.
Avocet shares are trading on a December 2011 earnings multiple of 13.4 times, falling to 12.1 in 2012. Should the company continue to meet it production targets and have success in its exploration project, the shares should be re-rated to a higher level.
Entering its third year under almost total state ownership, Royal Bank of Scotland is likely to be one of the better- performing banking sector shares this year.
Under the leadership of chief executive Stephen Hester, RBS has effected one of the most radical restructuring plans ever seen, with Mr Hester showing a ruthless hand in selling off businesses once regarded as the bank’s crown jewels. In 2011 it is likely investors will begin to see the upside of the Hester era cutbacks in the shape of a leaner, far more efficient RBS that is starting to look like a business capable of standing on its own.
Like its partially government-owned stablemate Lloyds Banking Group, RBS valuation will to some extent be dependent on the outcome of the Independent Commission on Banking report, due to be published in September. Unlike Lloyds, RBS is likely to escape relatively unscathed, having already sold off several hundred branches to rival Santander, opting perhaps wisely to show it is willing to put through painful cutbacks.
While 2011 will be a difficult year for banks, RBS looks relatively well-positioned to be a good performer and investors would do well to consider it as part of their portfolio.
Housebuilders have suffered a torrid three years on the stock market and the housing market is still stuffed with uncertainty, but Barratt Developments appears to have found a way to make money in the downturn.
Despite house prices being static, its November trading update said average selling prices rose by 9pc year-on-year. The company, Britain’s biggest housebuilder by volume, has focused on targeting areas where it knows there are buyers with equity, therefore building larger family homes and high quality apartments in London. In addition, the company’s bottom-of-the-cycle £750m spending spree on land will also start to boost profit margins, with roughly 14pc of sales in this financial year coming from new sites bought at historic discounts.
Barratt, which has £575m of net debt, is likely to begin refinancing talks early in 2011 ahead of 2012 maturities and expects them to be successful. All this means it is also well positioned when a sustained recovery in the housing market does arrive, which should happen eventually given the supply-demand imbalance in the UK.
High oil prices make for happy oil companies. With most analysts predicting the return of $100 oil in 2011, Royal Dutch Shell is looking like an attractive option. The energy major saw its production rise 5pc in the last quarter following seven years of declining output and a number of new projects are expected to boost this further over the next 12 months.
Its rival, BP, has lost some of its lustre after being hurt by the Gulf of Mexico oil spill, although it is now expected to return to dividend payments at a lower level in the first quarter. Shell, which has gone through a few years of radical cost-cutting, is the natural replacement in the income seeker’s portfolio.
Demand for gas is only going to grow as the world moves from reliance on high-carbon coal to lower carbon gas. Furthermore, oversupply is concentrated in the US and less marked in Europe and Asia, which are still paying decent prices for liquefied natural gas supplies.
You cannot tell what disasters may be around the corner for an oil and gas company – take BP’s oil spill that halved its market value. Investing in the oil and gas sector is always risky. But Peter Voser, Shell’s chief executive, appears to have trimmed the company into shape and 2011 may be the year it comes up trumps.
Vodafone will be going places this year. Now that almost all its markets (bar India and Spain) are heading in the right direction, Vittorio Colao, chief executive, will be able to give his full attention to the sale of more of the mobile giant’s disparate minority assets.
Vodafone has already raised £7.4bn from the sale of its stakes in China Mobile and Japan’s SoftBank. Next up are its 44pc stake in French operator SFR and its stake in Poland’s Polkometel, which is expected to fetch £3.4bn.
The real question on investors’ lips will be what’s going to happen to the company’s 45pc stake in US mobile giant Verizon Communications. The stake, which has been valued at £33bn, has been the talk of the town for more than a year already, amid speculation Colao has decided it is time to cash in on Vodafone’s US ambitions.
Although I reckon talk of a sale is overplayed, considerable upside comes from the likely resumption of hefty £3.5bn annual dividend payments this year. Even without this bonus, Vodafone’s shares are yielding an impressive 5.3pc, making it a perfect portfolio filler for anyone looking for a steady income.
Oh, and it’s one of Charles Stanley’s tips of the year too.
Mulberry is a mini-Burberry and is well worth a punt. Shares in the luxury label – which is best known for its handbags – doubled last year, but there is a lot more growth to come. The company recently said Spring/Summer 2011 orders were up by 91pc and that revenues over the first six months of its financial year increased by 38pc to £44.7m. It is about to open new stores in Manchester, Sydney and Amsterdam as well as the flagship store on New Bond Street, London.
Mulberry is a hot brand right now. In December it won the “designer brand” award at the British Fashion Awards. For a clue of how it might perform, look at Burberry. Mulberry’s trajectory is a number of years behind the larger label’s growth pattern – and Burberry’s growth has continued unabated.
Mulberry is expanding quickly into Asia and is taking full advantage of the emerging middle classes there. At present it has 44 shops in the UK and 38 around the world, but by the end of 2011 it will have more stores overseas than it does in the UK.
Hot brands can go cold, but there is no sign of this happening at Mulberry. The company has a steady, small group of large shareholders. Stick some shares in your Tillie bag and watch them soar.
Informa, the business-to-business group, may be a far cry from the glamour and consumer appeal of most UK media stocks. However, the breadth of its businesses, the speed of growth in late 2010 and low exposure to volatile advertising markets, make it a front runner in the unpredictable media sector. There are clear risks.
However, Informa, which owns Datamonitor and Taylor & Francis, has proved to be structurally robust and well placed to deliver growth in 2011. It recently announced good recovery in conferences, double-digit growth in forward bookings at its exhibitions division and improvement at its training arm.
High debt levels have cast a dark shadow over Informa in recent years, but its balance sheet now looks much stronger. Net debt is set to finish the year at 2 to 2.5 times earnings.
A merger with UBM, which came close in June 2008, now seems less likely , but there is still M&A potential. The likely long-term future of Informa is to merge with Springer Science & Media. There are clear risks, as conference attendance and journal subscriptions will be hit in the event of a downturn in 2011. The exhibition business is also weighted towards the first half of the year. However, if the economy is on its side, Informa could prove to be the envy of its more colourful friends in the media sector.
After the horrors of BP’s spill, plenty argue that betting on the oil sector’s continuing ascendancy is a foolish way to spend your money.
But regardless of the green energy lobby, oil companies will continue to boom in 2011 – fuelled not least by relentless development in the emerging markets.
BowLeven soared by 316pc last year on the back of new discoveries in Cameroon, but there’s every reason to bet that the spurt has just begun.
The Aim-listed company has so far drilled the edge, not the centre, of its structures and it’s fully financed to fund multiple wells this year thanks in part to a $113m (£74m) fund-raising at the end of 2010. The company’s focus is West African oil and gas deposits, and the company told shareholders at its recent annual meeting it hopes to be able to book reserves in respect of its Cameroon finds as early as 2012.
Above all, in a sector prone to gushers, BowLeven stands out with its boss Kevin Hart – the former finance director of Cairn Energy – both steady and experienced and able to build on two decades in the energy sector as first banker and company director.
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