John Waples
FILTRONIC
This year I am going for a very safe stock, Filtronic, the telecoms
components company. It has a market value of £125m and after a £12m disposal
this month of its semi-conductor business is now sitting on a cash pile of
£130m. It may have to pay out £25m-£40m to meet pension liabilities but,
even so, its three remaining businesses are worth £50m, according to JP
Morgan Cazenove. Filtronic has had a troubled history but has now greatly
reduced in size and is more manageable. In my view there is a 30% upside
potential in the share price and the downside is limited. The shares closed
on Friday at 174½p, but Panmure Gordon came out with a recent note putting a
target of 227p on the shares. The broker believes that Filtronic’s cash
equates to 131p per share. The group is due to report half-year figures next
month and should explain how it will return some surplus capital to
shareholders.
Dominic O’Connell
ARICOM
I was tempted to go for British Airways, for three reasons. First, Terminal
Five should open in March, bringing a ray of sunshine into passengers’ grim
Heathrow experience. Second, the company should return to dividend payments.
Third, it should hit its long-held goal of a 10% operating margin. But all
that could be flattened by a serious downturn in America, where BA makes a
lot of its profits.
Instead, I have gone for something risky. Aricom is the latest venture from
Peter Hambro’s Russian production line, with iron ore and other mineral
prospects. It did a big piece of fun-draising early this year before the
credit crunch hit, then moved from AIM to the main market in November. The
shares responded and are about 10% up over the past month. Aricom will
benefit from iron-ore price rises, and it could also become a takeover
target. The shares finished last week at 75¾p.
Grant Ringshaw
AVIVA
Banking shares have been pummelled and while it is tempting to try to call
the bottom, it is a mug’s game given the uncertainty in the credit markets.
Instead, I am opting for Aviva. Like many of its rivals, Britain’s
second-big-gest insurer is trading close to a record low valuation (barring
the solvency crisis of 2002-3) even though it and others in the sector are
enjoying strong solvency, rising profitability and better cashflows. The big
threats are a possible fall in the stock markets and some nasty surprises
from the credit crunch.
Aviva’s shares, 672p, trading at a measly nine times 2007 earnings, seem to
have been oversold. The investment bank Keefe Bruyette & Woods recently
said the company was trading at a 46% discount to the sum of its parts.
Next year is likely to be a big one for Aviva and chief executive Andrew Moss.
Separating the life and nonlife arms would be tricky, but selling the Dutch
business or roadside recovery group RAC to return cash might be the price
needed to placate activists. Aviva is a good each-way bet.
Jenny Davey
BERKELEY GROUP
The shares of housebuilders have bombed amid growing fears of a housing
slump. But I suspect the worries are overblown and prices are unlikely to
crash in 2008. I believe London and southeast England will fare better than
many other parts of Britain, so I am putting my bets on Berkeley Group.
Its shares have already lost a third of their value in seven months even
though demand for its homes has stayed resilient. If the share price falls
much lower, Berkeley founder and managing director Tony Pidgley will be
tempted to try to take the company private. At £13.51, the shares are
slightly more expensive than sector peers at 10 times prospective 2008
earnings. But management seems confident the company will buck the gloom –
Rob Perrins, finance director, has recently added to his holdings, and next
month Berkeley will pay out a special £2-a-share dividend a full year ahead
of schedule. The shares are worth buying on hopes of a cyclical rebound in
the second half of 2008 boosted by interest-rate cuts and improving
sentiment.
James Ashton
LOGICA CMG
IT services company Logica CMG has been a serial underperformer, but with new
chief Andy Green, who begins work this week, it finally has a chance to
shine.
The BT veteran’s in-tray is bulging. He must knit together acquisitions made
by his long-serving predecessor Martin Read. Improving Logica’s subscale
Indian outsourcing base is another pressing task. But the key concern is the
company’s British arm. It accounts for 28% of sales, which have been falling.
Logica shares have slumped 27% since November 5, when the company cut its
full-year sales growth forecast to 3%. The company faces big challenges, but
at this level looks oversold. Logica shares, at 117¼p, are trading on a
price-earnings ratio of 11 times 2007 earnings and just nine times for 2008.
They are supported by a 5% dividend yield.
A turnround will not be painless. The chances are that Green will instigate
write-downs and disposals. But if he gets things even half-right, there is
plenty on the upside at Logica. It could even become a target for Indian
rivals such as Tata or Infosys, keen to expand quickly in Europe.
Louise Armitstead
HAMMERSON
This year I’m choosing Hammerson, which I think has been oversold and,
if it remains this cheap, will be a bid target. The double blow of the
squeeze on borrowing and the fallout from the sub-prime mortgage market has
hit property stocks hard in the past six months. The market took fright and
predicted the end of the extraordinary housing boom. Many think that the
prospects for the sector will get worse in 2008.
Hammerson has suffered with the others – its shares have plunged 36% since the
summer – and with the price now at £10.09 the stock is at a big discount to
the last reported net asset value of £16.35 per share.
Admittedly, this net asset value may fall to £15 when Hammerson reports its
next half-year figures, but the company has a prime portfolio supported by
an average lease length of 10 years.
A number of rivals, including West-field, an Australian property group, are
looking at Hammerson’s portfolio of shopping malls and, if credit markets
ease, could launch a takeover bid.
Ben Laurance
GALIFORM
Investors in Galiform, parent of Howden Joinery which makes kitchen units,
have had an uncomfortable year. The shares nudged 170p in the spring but
have since fallen to 92p. Pessimism about retailing generally and about
housing in particular have dragged them down.
But the current share price fails to recognise the profit gains the company
should make as depots opened over the past couple of years build their
sales. New outlets are initially loss-making but steadily increase sales and
profits. By year seven, a typical outlet generates sales of more than £2m
and operating profits of about £500,000. Howden’s customers are builders
rather than DIY enthusiasts.
The group’s underlying pretax profits could top £90m in 2008, giving earnings
of nearly 10p a share. Even if Galiform doubles its dividend in 2008, that
would give a payout of only 2.2p a share: not a stock for people seeking
income. But measured by price-earnings ratios, the shares look very
oversold. They should make big gains over the coming 12 months.
Matthew Goodman
GLAXO SMITH KLINE This will be a year of change for Glaxo Smith Kline. In
May, Andrew Witty will succeed Jean-Pierre Garnier, chief executive for the
past seven years, with a mandate to shake things up at Britain’s biggest
pharmaceutical company. The board will be glad to see the back of 2007, with
the fallout over Avandia, its diabetes drug, and the announcement of job
cuts and restruc-turing. There are significant launches to come in 2008,
with Tykerb, a breast-cancer drug, and Cervarix, its cervical-cancer
vaccine, both making their debut in Europe. Over the next two years, there
are about 10 new drugs coming on stream, although the group must also
contend with a number going off patent.
But with the shares languishing a little above their 12-month low, Witty will
have to convince the City that big pharma has a future, otherwise he will
find investors becoming impatient for more radical action. The shares trade
at about 13 times this year’s earnings, and are underpinned by a £12 billion
buyback programme. They are a buy at £12.81.
