Shares

GREAT
value
STOCKS
T
o
p

n
a
m
e
s

t
o

b
u
y
at kn
o
c
k
-
d
o
w
n

p
r
i
c
e
s
Vol 14. Issue 02 / 12 January 2012 / 4.10
COMMODITIES
FOREX
FUNDS
REITS
SIPPS
ETFS
+ MUCH MORE...
PUT FIZZ IN YOUR PORTFOLIO - Drinks plays to cheer - see page 40
9 771468 110136
0 2
a new approach
to share trading:
dont buy any
The Share Centre Limited is a member of the London Stock Exchange and is authorised and regulated by the
Financial Services Authority under reference 146768. The Share Centre, PO Box 2000, Aylesbury, Bucks, HP21 8ZB.
CFD Trader is a trading name of IG Markets Ltd, which is a member of the London Stock Exchange and is authorised
and regulated by the Financial Services Authority. FSA Register number 195355.
For the experienced investor, CFDs oer a number of benets like only needing a
deposit of around 5-10% of the value of your chosen asset, and not paying any UK
Stamp Duty. Not to mention having the opportunity to make money even when share
prices are falling. But remember that CFDs are not suitable for everyone, so you need
to fully understand the risks involved.
CFDs are a leveraged product, and it is possible to quickly lose more money than
your initial deposit; you may also be required to make further deposits at short notice.
CFD Trader is operated by IG Markets, part of the IG Group.
To nd out more about our CFD trading service
call us on 0845 61 85 245 or go to www.share.com/cfd
Introducing CFD trading from The Share Centre
742_CFD_Shares_Magazine_270x205.indd 1 17/10/2011 11:15
Opinion 04
Managing to succeed part I
Agenda 06
Smith & Nephew to show it is in rude health
Plays 10
World of opportunity at International Personal
Finance
Databank 12
Fenner belting along
Funds 23
Bolster your defence with dependable distributions
Commodities 30
African Mining to show its golden touch
Small Caps 32
Augean upgrades rest on court ruling
The Oracle 36
How to understand.....silicon chips (Part I)
Chartist 38
Dollar too strong for sterling
Forex 44
American economy leaves Europes for dead
Mr Market 49
Why the FTSE 100 is safer than cash
Director Deals 50
Conygar looks a canny trade
Investor services directory 52
Letters 54
ONLINE AT WWW.SHARESMAGAZINE.CO.UK
Get all the results, stories, facts
and figures, plus our large and
mid-cap tables at
www.sharesmagazine.co.uk
/ftsetables
Editor
Russ Mould
Deputy Editor
Simon Keane
Companies Editor
Dan Coatsworth
Small Caps Editor
Steven Frazer
Reporters
James Crux, Royston Wild,
Vishala Sri-Pathma, Tom Sieber
Head of Production
Michael Duncan
Designer
Thomas Plumstead
Junior Designer
Stephanie Gunn
Managing Director
Mike Boydell
Sales Director
Richard Collins
0207 378 4404
Advertising Manager
Marcus Reilly
0207 378 4582
Senior Sales Executive
Victor Georgiades
020 7378 4592
Subscription Services
01444 475 661
Shares magazine (ISSN: 14681102) is published
weekly every Thursday (51 times per year) by
MSM Media Ltd, Thames House, 18 Park Street,
London SE1 9ER. Company Registration No:
3733852. ISDN: 020 740 3423. Member, Audit
Bureau of Circulations
Ltd. All Shares material
is copyright. Repro-
duction in whole or part
is not permitted without
written permission from
the editor.
www.abc.org.uk
GREAT
value
STOCKS
12
JANUARY
2012
Contents
14 Cover Story
While the economic and market
outlook may be uncertain for
2012, some simple number
crunching should mean Shares
readers can beat the herd by
digging out the UK equity
markets best bargains.
40 Sector Report
Beverages
The drinks sector should
continue to represent a
resilient investment arena
throughout 2012, with many of
its constituents well-placed to
generate above-trend growth.
24 Feature
The perfect portfolio II
Investors with lengthy time
horizons should look through
deflationary scares and plan
for inflation.
46 Feature
Calling international rescue
Investing abroad brings clear
benefits but this simple guide
highlights how to avoid the
key pitfalls.
Please turn to p55 for this
weeks Companies Index
4 Shares 12 January 2012
Russ Mould
D
avid Cameron's initiative
to give shareholders the
right to block boardroom
remuneration packages brings
the issue of executive pay right back in to the
headlines. Even if I think he will get nowhere
fast, I share the prime minister's views that
excellence should be rewarded and failure
should not.
For publicly listed rms, the ultimate
arbiter of executive performance is the share
price. That in turn will be driven by whether
a manager can create shareholder value or
not and those two concepts, though closely
linked, must never, ever be confused.
Very, very few managers consistently
create shareholder value and as a result
reward investors with strong trend total
shareholder returns (TSR), in the form
of capital appreciation and dividend
payments. But there is a select group
whom Shares is prepared to back, including
Vin Murria, of Advanced Computer
Software (ASW:AIM), Michael Jackson
of Access Intelligence (ACC:AIM)
and Mark Watts' team, whose latest
ventures include Marwyn Management
Partners (MMP:AIM) and Paragon
Entertainment (PEL:AIM).
Pay packet pickle
While David Cameron's plan to
give shareholders a direct and
binding vote on corporate leaders'
salaries and bonuses is good politics,
I do not expect the scheme to get
any traction, or make any
great dierence to the
markets.
Shareholders
already get a
chance to voice
their opinion,
when they can
vote on a rm's
remuneration
report at
the Annual
General
Managing to
succeed part I
Retail investors can do little about executive pay but a lot about the stocks they buy
Meeting. But the big fund management
houses rarely, if ever, choose to rock the
boat. Even when Marks & Spencer (MKS)
came in for some ak in summer 2010 over
the packages handed to then non-executive
chairman Stuart Rose and incoming chief
executive o cer (CEO) Marc Bolland
they went through on the nod. Only 8% of
shareholders voted against and another 8%
abstained. Meanwhile, the nation's retail
investors are unlikely to have a stake big
enough to ensure your votes count.
But that does not mean to say Shares
readers have to lump it if they feel a boss
is being paid too much. No-one is obliged
to own any stock and if you feel someone
is pulling in too big a wage you can simply
exercise your right to dump the shares and
be done with it.
Creating value
But the trick is how to decide whether a
pay packet is fair and appropriate. It is here
that thorough research is needed to see
whether a CEO or executive chairman and
his or her boardroom team are creating
shareholder value. If they are, cashow
and prots will drive the share price
higher. If they are not, cashow
and earnings will decline, the
share price will fall and the
company become progressively
weaker. In the latter case, the
end game may well see either
the management ousted by its
shareholders, the appearance
of a predator or the rm
even fall in to
bankruptcy.
This careful
research can
take two
forms:
A considered reading of the report and
accounts. Here you will be able to ascertain
what is the rm's strategy, assess its nancial
performance and establish the identities,
experiences and skill sets of the individuals
who constitute the board.
Meeting the management. Institutional
investors are spoiled for choice here and
Shares also gets many opportunities to meet
and question the biggest names in Britain's
boardrooms. I accept that for
retail investors this is harder. But there are
regular investor conferences that can be
attended, including those organised by
Shares and its sister businesses, while many
rms are getting increasingly savvy at using
podcasts and webcasts to connect with
potential shareholders.
In the second part of this column next
week, I shall go into greater detail about
what exactly you should be looking for
during your research. Whether through
the analysis of cold, hard numbers or
consideration of some of the softer, less
tangible indicators, there are some key ags
to watch out for. But for starters, I would
urge you to consider two things.
First, always think of a CEO or chairman
as the person who is investing your cash
as that is actually what they are doing once
you become a shareholder. If they start
behaving in a way designed to satisfy their
own whims rather than to provide you with
nancial returns that compensate you for
the risk you are taking with your cash (see
Feature, page 24), it is time to sell and take
your money elsewhere.
Second, growth is not a strategy. Any
manager who tells you their plan is to 'grow
the business' does not deserve to be paid.
They do deserve to be sacked before they
can do any lasting damage. Growth is the
outcome of a sound strategy, not a strategy
in itself and next week I shall demonstrate
how corporate policy, its formulation,
success and failure can be quantied and
assessed, and all in terms of that vexed
concept of shareholder value.
A

D
a
i
m
l
e
r

B
r
a
n
d
The C
-
Class Sport Saloon.
From only 299* a month.
With muscular AMG body styling, speed sensitive steering, sports suspension,
a sports braking system and rather special 18" AMG 7-spoke alloy wheels.
Just 299* a month could put you behind the wheel of a C-Class Sport Saloon.
Visit mercedes-benz.co.uk/oers
*For Business Users only. Advance payment applies. Official government fuel consumption figures in mpg (litres per 100km) for the C-Class
Saloon range: urban 15.5(18.2)-50.4(5.6), extra urban 33.6(8.4)-76.3(3.7), combined 23.5(12.0)-64.2(4.4). CO2 emissions: 280-117 g/km. Model featured is
a Mercedes-Benz C 180 BlueEFFICIENCY Sport Saloon at 29,665.00 on-the-road including optional metallic paint at 645.00 (on-the-road price includes VAT, delivery, 12 months Road Fund Licence, number plates, first registration fee
and fuel). *All payments subject to VAT: Finance example based on a Mercedes-Benz C 180 BlueEFFICIENCY Sport Saloon with metallic paint on a 36 month (6+35 profile) Contract Hire agreement, excluding maintenance, with an advance
payment of 1,794.00. Based on 10,000 miles per annum. Excess mileage charges may apply. Rental includes Road Fund Licence for the duration of the contract. Written quotations available on request including alternative contract lengths
and mileages. Guarantees and indemnities may be required. This finance campaign is available on C-Class Saloon models ordered/credit approved between 1 January and 31 March 2012 and registered by 30 June 2012, excluding AMG
models. Terms and conditions apply. Offers are subject to availability. Offers cannot be used in conjunction with any other published offer from the Retailer. Some combinations of features/ options may not be available. Please contact your
Mercedes-Benz Retailer for availability. Credit provided subject to status by Mercedes-Benz Financial Services UK Limited, MK15 8BA. Prices correct at time of going to press 12/11.
19 26 2 9
DEC JAN
570
580
590
600
610
620
630
640
650
660
SMITH & NEPHEW
ZIMMER HDG.
STRYKER
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
J F M A M J J A S O N D J
200
250
300
350
400
450
500
550
600
NAUTICAL PETROLEUM
FTSE ALL-SHARE OIL & GAS PROD
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Tomorrows news today
Tom Sieber
BUY SHARES IN North Sea-focused oil play Nautical Petroleum
(NPE:AIM) now it is no longer hampered by a nancially hamstrung
partner. The 227 million cap should therefore be in a position to
submit a eld development plan on its key Kraken discovery in the
second half as planned.
Nautical Petroleum, which has a 50%
stake in the asset, saw its prospects of
keeping the project on schedule improve
signicantly this month (9 Jan) after the
well-funded EnQuest (ENQ) agreed to
buy Canamens 20% stake. The latter was
struggling to meet its commitments on
Kraken due to a lack of resource.
While a readthrough on the terms of the
deal may not be that encouraging for Nautical
shareholders
at rst
glance, with the $90
million oer valuing the elds reserves at
just $2.8 per barrel of oil, the low-ball price is a
reection of Canamens straitened nances rather
than giving a true picture of
Krakens worth.
Nautical remains keen to arrange a
farm-out with another party. Details
of that transaction should give a more
reliable snapshot of the elds worth, as
well as being a potential future catalyst
for the stock.
Shares says: The deal is good news for
Nautical. BUY at 258.8p.
New partner EnQuest should help keep North Sea development on track
Awakening Kraken at Nautical
Vishala Sri-Pathma
E
ncouraging news from US-listed
peers means investors should
look to pick up stock in market
laggard Smith & Nephew (SN.)
ahead of fourth-quarter results due out
early next month (2 Feb). Restructuring,
the prospect of stronger-than-expected
earnings and even the attentions of a
possible predator are all potential catalysts
for performance.
Decembers numbers from private
equity-owned Biomet and this weeks (9
Jan) positive pre-announcement from St.
Jude Medical (STJ:NYSE) both oer a
positive readthrough. The former agged an
acceleration in demand at its hip and knee
business, while the latter stated pacemaker
and debrillator sales were tracking
expectations. Shares in US rms Zimmer
(ZMH:NYSE) and Stryker (SYK:NYSE)
have responded favourably to this
commentary and although Smith & Nephew
has risen 8% since agged as a contrarian
buy (see Sector Report, Shares 1 Dec 11) the
British rm still has some catching up to do.
Last week (4 Jan) Smith & Nephew
announced a move to spin o its biologics
arm into a new US-based joint venture that
will be majority owned by private equity rm
Essex Woodlands. In addition to its 49%
stake in the new operation, to be known
as Bioventus, the British rm will receive
63.6 million cash so it can pay down debt
and a $160 million veyear note. The
partnership will funnel investment into
one of the most innovative parts of the
orthopaedics market.
Following a disappointing third-quarter
update (4 Nov), Smith & Nephews new chief
executive o cer, Olivier Bohuon, declared
a change in strategy in November, arguing
the orthopaedics group needed to adapt to
changing market demands. We expect to
see the rst signs of progress when the 5.3
billion cap reports next month, just after
results from long-term rumoured bidders
Johnson and Johnson (JNJ:NYSE)
and Stryker, which is due to announce
their fourth-quarter gures on 24 January.
Shares says: BUY Smith & Nephew
at 600p.
Healthcare giant can bounce back after weak third-quarter gures
Smith &
Nephew
to show it
is in
rude health
Shares 12 January 2012 7
600
800
1000
1200
1400
1600
1800
2000
1ST.QUANTUM MRLS. (LON)
FTSE ALL-SHARE MINING
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Steven Frazer
AGGRESSIVE TRADERS SHOULD consider taking a contrarian
stake in XP Power (XPP) on hopes demand in some markets will
improve faster than the market is anticipating.
The 132 million cap said this week (9 Jan) the macroeconomic
slowdown had hit some of its market segments and as a result sales
had dropped 5% year-on-year in the fourth quarter. In response the
shares short-circuited and fell 14% on Monday to 800p.
But XP Power, which designs and builds critical power
components for original equipment manufacturers (OEMs) in
engineering, telecoms and medical markets, has made stellar
progress over the past 12 months. Preferred supplier status has
been earned on key design contracts with several large OEMs. In
addition, its new, state-of-the-art manufacturing facility in Vietnam
will come onstream early this year, opening the door to new contract
opportunities in the Far East.
Most analyst have maintained share price targets of above
16.50, implying 50%-plus upside.
Shares says: This is a high-risk pick but one that could pay o rapidly
for brave investors. SPECULATIVE BUY at 800p.
Investors blow a fuse after disappointing trading
Focus on brands and licensed products
should serve developer and distributor well
XP still worth
picking as
a power play
James Crux
PREVAILING PRICE WEAKNESS presents an opportunity to pile into
toys and games developer Character Group (CCT:AIM) ahead of half-year
results in April. Market share gains through new product launches and the
addition of new brands oer catalysts for a rerating of the protable, cash
generative company.
Shares in the 32.5 million cap, known for its Doctor Who and Peppa Pig
brand licenses, have fallen 34% from their 216p (15 Feb 11) ve-year peak.
This decline fails to account for the growth potential of Character, armed
with an expanding product range and performing robustly thanks to its
focus on brands and licensed products.
Despite well-documented retail sector di culties, annual results (29 Nov
11) to August were highly creditable. Taxable prots skipped 20% higher to
9.1 million and the dividend was lifted 50% to 6.0p.
With a 202p price target implying 42% upside, Merchant Securities
expects 25.8p of earnings per share (EPS) and a maintained 6p payout
for this year. Those estimates place the shares, which oer a comfortably-
covered 4.2% yield, on a grudging price/earnings (PE) ratio of just 5.5 times.
Shares says: BUY Character at 142.5p. A forward earnings multiple
of 5.5 ignores the potential for protable market share gains.
Toy company to
show its character
James Crux
COPPER PRODUCER First Quantum Minerals
(FQM) is to get a $1.25 billion valuation boost
after resolving a legal battle with sector peer
Eurasian Natural Resources (ENRC). Buy at
13.76 as this will provide funds to support
growth plans and should remove political risks
as First Quantum and the Democratic Republic
of Congo (DRC) government are expected to
drop legal action against each other.
Both the ENRC and DRC government
legal issues relate to the loss of three mining
projects between 2009 and 2010. The DRC
government initially revoked First Quantums
licence for the Kolwezi copper tailings project,
even though the miner had
invested more than $400 million
in the asset. Analysts valued
Kolwezi at $2.5 billion, yet in
2010 the government sold it
to ENRC for $175 million. First
Quantum took legal action and a
further two projects were taken
away by the authorities.
ENRC has now agreed to pay $750
million, expected next month, and
a further $500 million over three
years for the projects. Analysts have
not factored any compensation in
to their models for First Quantum
so the forthcoming cash injection provides a
signicant boost to the 6.5 billion market cap.
Stockbroker Numis has raised its price target
from 13.50 to 16.
First Quantum plans to spend $2.5 billion
by 2015 to expand its copper production in
Zambia. The cash boost should reduce debt
requirements. Outside of this country, the
miner plans to start production in mid 2012 at
the Kevitsa nickel mine in Finland. This follows
the start-up of the Ravensthorpe nickel project
in Australia in late 2011. First Quantum is also
looking for copper in Peru and a variety of
metals in parts of West Africa.
Shares says: BUY First Quantum
Minerals at 13.76.
Miner concludes lengthy legal battle over assets loss
Cash pile to leap
higher at First Quantum
Tom Sieber
INVEST IN HEAVYWEIGHT oil explorer Tullow Oil (TLW) at 14.30 ahead
of next weeks (18 Jan) trading statement. The announcement should reveal
the rms progress in boosting output from the Jubilee eld in Ghana and
provide an update on the progress of a hotly anticipated well aimed at testing
the potential of the Jaguar prospect oshore Guyana, South America.
This well, which is targeting up to 700 million barrels of oil equivalent
(boe), represents a follow
up to last Septembers
Zaedyus discovery. Shares
would expect Tullow to rise
in anticipation of the results
from additional drilling in
the region.
In November the 12.8
billion cap downgraded 2011
production expectations from
between 82,000 to 84,000 barrels of oil equivalent a day (boepd) to a range
of 79,000 to 81,000 boepd as it encountered mechanical issues on a number
of wells. A so-called sidetrack well, J-07, aimed at addressing some of these
problems is expected to come onstream early this year as the group maintains
its faith in a 2012 production target of 100,000 boepd.
Shares says: Progress with exploration eorts and in meeting this years
targeted output should provide a lift to the share price. BUY Tullow Oil.
Oil explorer gets busy in Latin America
Buy composites manufacturer ahead
of Februarys gures
Tullow chases Jaguar
Royston Wild
BUY Umeco (UMC) at 365p ahead of next months interims (17
Feb) which should emphasise the robust and reliable nature
of the business. The Leamington Spa-headquartered rm
provides advanced composite materials to a variety of long-
term growth markets, including the aerospace and defence,
wind energy and automotive sectors.
The 176 million caps interims (8 Nov) revealed a 7.3% year-
on-year rise in revenues to 105.7 million for the rst half, while
prot before tax grew 7.8% to 8.3 million as the company
beneted from an improved business mix. A recovery in the
gigantic Chinese wind market, following reduced activity due
to domestic infrastructure issues in the last year, should also
boost the companys prospects.
Broker consensus expects earnings per share (EPS) to
advance 10% to 27p for the scal ending in March, and to
progress by a further 18% to 31.9p in 2013. That puts the
shares on just 11.4 times next years earnings.
Shares says: BUY Umeco at 365p.
Umeco to oer
material gains
James Crux
USE THE LAST months decline from 500p as
a buying opportunity at Bovis Homes (BVS).
Next Mondays (16 Jan) 2011 trading update -
and forthcoming full-year gures (27 Feb) - are
likely to showcase positive progress with new
site openings and solid sales rates at the FTSE
250 housebuilding rm.
Towards the tail end of last year (8 Nov),
Bovis chief executive o cer (CEO) David
Ritchie pleased with news of continuing
positive momentum over the ten weeks since
the 575.5 million caps interims (30 Aug).
Positive indicators included a 29% year-on-
year jump in net private reservations to 393,
and a 40% surge in visitor numbers over the
same period. Despite di cult conditions for
the housebuilding industry, due not least to
restricted mortgage availability, net private
reservations in rose 22% in the 44 weeks to
4 November, driven by a 10% year-on-year
growth in the number of Bovis outlets and
marked improvement in the rate of sales
achieved per site per week.
Bovis strategy to buy land at the bottom
of the cycle means it looks strongly placed
for growth at higher margins, based on its
enviable pipeline of strategic plots. The Kent-
headquartered concern continues to invest in
good quality sites with a focus on the south of
England, where prices are stronger than the
rest of the UK and appear likely to remain so.
Balance sheet strength is a further tick in
the box. At last count (4 Nov), the company
sported just 31 million of net debt and next
weeks announcement could contain news of a
year-end return to a modest net cash position.
Broker Panmure Gordon, with a 467p price
target, raised its full-year prot forecast by
2.5% to 32.5 million and its earnings per share
estimate 2.3% to 17.8p following Novembers
update. Besides scope for further upgrades,
Bovis trades at a 20% discount to latest
reported net assets of 538p a share.
Shares says: BUY Bovis Homes at 430.5p.
Bovis a buy on southern strengths
Housebuilder
has scope to
expand its
prot margins
900
1000
1100
1200
1300
1400
1500
TULLOW OIL
FTSE ALL-SHARE OIL & GAS PROD
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst

ISA
tonic
What makes an ISA fit for purpose?
Quick set up? Great value? Flexibility?
Whether youre an experienced investor or new to the stock market, well
make it easy for you to invest your tax-efficient allowance. After our quick
online set up, you can take your pick from a wide range of investments, or
our plain-speaking experts can guide you (at no extra cost).
Remember, tax allowances depend on your individual circumstances and
the benefits of ISAs could change in the future. The value of investments
and the income from them can go down as well as up, and you may not
get back your original investment.
Its simple, easy, and just the boost youre after.
call us on 0845 6185 245 or go to www.share.com/isatonic

The Share Centre Limited is a member of the London Stock Exchange and is authorised and regulated by the
Financial Services Authority under reference 146768. The Share Centre, PO Box 2000, Aylesbury, Bucks, HP21 8ZB.
2011-221- tonic-shares- indd.indd 1 19/12/2011 11:30:28
Key trades to make
10 Shares | 12 January 2012
Simon Keane
A
33% three-month retreat has
created a trading opportunity
for risk-tolerant punters ahead
of a likely reassuring update
from International Personal Finance (IPF)
at next months fnals (29 Feb). Sentiment
towards the doorstep lender has been battered
by concerns related to the eurozone economic
slowdown and sovereign debt crisis.
Macro meltdown
Hungary in the grip of a major economic
malaise. With a reported 4.6 billion of
overseas debt due to mature this year any
marked deterioration in the economic
outlook could tip the country over the
edge, especially as Januarys changes to the
constitution have left prime minister Viktor
Orbn at daggers drawn with his potential
rescuer, the international Monetary Fund.
but Hungary was the source of just 10%
of international Personal Finances pre-tax
profts last year, with the bulk of taxable
earnings derived from the more credibly
led Poland, Czech republic and Slovakia.
Poland, under the auspices of its newly
re-elected prime minister Donald Tusk, is
pushing through necessary cuts to reduce
SHAReS SUmmARY
The doorstep lenders business model remains
intact even though the eurozone storm con-
tinues to challenge its core Central and Eastern
European markets
Business: Provider of small value and short-
duration loans to sub-prime borrowers
vItAL StAtS
market value: 403.6 million
Historic Pe 2010: 7.2
Prospective Pe Dec 2011: 5.3
Prospective sector Pe 2012: 17.7
1-month relative strength: -24.6%
1-year relative strength: -53.3%
Prospective dividend yield: 5.0%
Bid/ofer spread: 0.26%
International
Personal Finance
(IPF) 155p
Stop loss: 139.5p
its budget defcit. ination remains under
control in the Czech republic, leaving scope
for interest rate cuts, while Slovakia is taking
measures to reign in public spending and cut
its budget defcit.
Trading strategy
Shares in international Personal Finance
slid when Hungary proposed a 30% rate
cap on consumer loans, since enacted. We
nipped in at 220p (see Databank, Shares,
15 Sept) for a quick 26% gain, as the stock
reached a closing high of more 278p two
days after Octobers reassuring third-
quarter results (25 Oct). a second sell-of
when the Hungarian state capped rates
for the overseas loans of its citizens gave
us another bite of the cherry when we
reiterated our buy (see Databank, Shares,
13 Oct) at 237p for a 17% two-week return.
a third chance to make a quick buck
may well have presented itself following
last weeks statement (5 Jan) currency
hedges for 2012 have been struck at levels
substantially less favourable than in 2011. a
plunge in the value of the Hungarian forint,
weakness in the Polish zloty and a sell-of
in the Czech koruna are all a concern but
150
200
250
300
350
400
INTERNATIONAL PSNL.FIN.
FTSE ALL SHARE FIN SVS
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m

Rebased to rst
SHARES IN Nichols (NICL:AIM) surged
higher following last weeks (6 Jan) trading
update and subsequent upgrades for
the Newton-Le-Willows-based company.
Investors who followed our buy call at
524.25p (see Plays, Shares 01 Sep 11) are
now comfortably in the money.
The soft drinks star said it had maintained
the excellent momentum highlighted at the
six-month stage, sending full-year sales 18%
higher against tough comparatives. Among
the brokers ratcheting up its numbers was
Brewin Dolphin, which hiked its 2012
forecast by 7.5% to 18.7 million.
Sustained investment behind
brands including Vimto and Levi Roots
soft drinks is enabling Nichols to outperform
the UK soft drinks market. Meanwhile,
the international business continues to grow
at rapid pace.
A progressive dividend payer about to
launch a range of Weight Watchers-branded
low calorie drinks, Nichols trades on a 2012
prospective PE of 15.1. That rating remains
undemanding given the long-term zz left in
the story. (JC)
J F M A M J J A S O N D
350
400
450
500
550
600
NICHOLS
FTSE AIM SS FOOD & BEV
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

04 Aug 11 Excellent interims unveiled
01 Sept 11 Shares buys at 524.25p
06 Jan 12 Trading statement well received
1
2
3
1
2
3
P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S P L A Y S U P D A T E S
World of opportunity at
International Personal Finance
Latest share price dip presents third chance for potential trading gains
12-mOntH PROFIt On ALL PLAYS OF tHe WeeK tRADeS: -3.9% vS. FtSe ALL-SHARe -2.9%*
* FtSe All-Share comparative performance is from start of each Plays trade until present or when prot taken/stopped out. the portfolio, which at the time of writing consists of 91 stocks and 50 open
positions, runs on a 12-month rolling basis. In the past 12 months, FtSe All-Share is down 7.2%.
the bad news looks priced in for now and
nimble traders may be able to proft from a
reassuring set of full-year fgures.
BUY
nichols (nIcL) 575p Gain to date: 9.7%
BUY
Shares | 12 January 2012 11
Key trades to make
Steven Frazer
We are buying more over the internet
than ever before, and there is huge growth
coming through mobile commerce while
cloud-based enterprise is booming. iT is
absolutely vital to how we live, work and
play these days. SQS Software Quality
Systems (SQS:AIM) is a fantastically cheap
way to access the iT theme ahead of an
expected upbeat trading update, due as early
as next week.
The 42 million cap, founded and based
in supplies business customers with rugged
testing and quality assurance for their iT
systems and applications. With 30 years of
experience under its belt, it today claims
to be the worlds leading independent
specialist. The iT testing market is expected
to grow by at least 6.5% a year for the next
three years. This might not seem much, but
compared to a cyclically contracting wider
iT industry, it makes testing one of the few
sweet spots.
Rising managed services
importantly, SQS has the management and
operational savvy to maximise its market
opportunity. at the end of last year (30
nov) the company unveiled its biggest ever
single contract. This is a two-and-a-half year
managed services deal with an unnamed
global fnancial services client worth 20
million (16.5 million). The landmark
agreement shows that, while still relatively
small, SQS punches above its weight in the
software testing market despite intense
competition, particularly from specialists in
north america and india.
Prior to this major contract, the frm
unveiled (18 aug 11) a series of deals worth
a total of 22 million. These orders were
for a wide mix of private and public sector
organisations, including one of britains big
four supermarket chains. it has subsequently
set up a French operation to support one of
these contracts, which is worth 5 million
over three years, and from which SQS stands
to earn its frst meaningful contribution.
InveStment cASe
Structural growth of IT testing
Rising managed services sales
Lowly PE and fat yield
Sector: Software & Computer Services
Sub-sector: Computer Services
vItAL StAtS
market value: 42 million
Prospective sector Pe 2012: 13.7
1-month relative strength: +0.7%
1-year relative strength: -25.7%
Prospective dividend yield: 5.4%
Bid/ofer spread: 4.46%
SQS Software
Quality Systems
(SQS:AIM) 153.5p
Stop loss: 123p
This slew of business wins proves
managements planned strategic shift from
one-of projects to recurring managed
services revenues is working. Such contracts
ofer better visibility and customer
stickiness. including the end-november
win, the value of its managed service order
deals last year, to end December, passed
62 million, and that is assuming the
absence of unannounced additional orders
in December. by comparison, SQS earned
managed services contracts worth 50
million in 2010. This puts the company well
on track to hit its goal of earning 50% of total
revenue from managed services within three
years as the topline here grows in relative
and absolute terms. This revenue stream has
jumped from 3% to 25% of total sales in just
two years, after factoring in the latest deal.
Valuation anomaly
in 2010 SQS posted a 21% increase in
revenues to just shy of 163 million, with
underlying pre-tax profts rising by a similar
margin to 8.6 million. House broker
arbuthnot Securities expects 2011 fgures
to be sharply up, estimating 184 million
and 10 million respectively, for growth
of 12% and 16%. earnings per share (ePS)
of 26.2 for 2011 can be expected. Looking
ahead arbuthnot sees sales hitting around
227 million by the end of 2013. To get there
would mean SQS producing taxable profts
of 12 million in 2012 rising to 14.4 million
next year, giving ePS of 31.3 and 37.3 for
the next two years. This puts the shares on
a 2012 price/earnings (Pe) multiple of just
5.9, falling to 5 in 2013. This sort of lowly
rating seems contrary to all of the evidence,
anticipating hefty forecast downgrades.
and it gives no credit at all to an anticipated
dividend worth 10 (8.3p) per share for the
year ahead, which itself implies a 5.4% yield.
140
150
160
170
180
190
200
210
220
230
240
250
SQS SFTW.QUALITY SYS.
FTSE ALL SHARE S/W & COMP SVS
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m

Rebased to rst
Double
your money
with SQS
These are the perfect ingredients for a
sharp share price re-think by the market, a
rerating that could put 250p within reach over
the next nine to 12 months, perhaps higher.
arbuthnot reckons the shares are worth 275p,
and even at 300p, the forward Pe would still
be below 10. This implies upside of anything
from 60% to doubling your money, and the
journey towards this goal may well start with
a end of year trading update next week.
BUY
Sharp rerating on the cards as
market eyes quality of IT testing
The numbers that matter
SPREAD BETS, CFDs and FOREX. Now on DealBook for iPad.
When trading CFDs, Forex and Spread bets, it is possible to lose more than your initial deposit.
Download today free from the App Store. Visit gftuk.com/ipad or call 0800 358 0864 TAP INTO GFT
GFT Global Markets Ltd. is authorised and regulated by the Financial Services Authority. 2012 Global Futures and Forex, Ltd. All rights reserved. CD03UK.213.010612 Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. facebook.com/gftmarketsuk twitter.com/gftuk
6535_GFT_SM_quDPS_410x40_TAP_iPAD_AW.indd 1 09/01/2012 18:47
T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K T H E D A T A B A N K
BUY Fenner (FENR) at 412.3p as it should continue to benet from its
exposure to red-hot end markets.
The 791 million caps core engineered conveyor systems division is
particularly strong in mining, while its advanced engineered products
seals business allows the rm to play in the booming, high-margin
medical and oil and gas arenas.
Fenner is also looking to supplement organic growth with select
acquisitions. In December it purchased Pennsylvania-based Allison
Custom Fabrication, a provider of material-handling equipment for the
mining industry. This reinforces its conveyor belt operations in the USA.
Even though Fenner is trading just below its all-time high of 422.5p,
the shares are changing hands on a prospective price/earnings ratio
(PE) of 13.4 for the 12 months to August. This looks attractive value
for a rm which more
than doubled pre-tax
income in ve years
between 2007 and
2011, even allowing
for a stumble in 2009.
Shares says: BUY
Fenner at 412.3p.
BUY William Hill (WMH) ahead of next weeks trading update (19 Jan).
The bookmaker should reveal strong Christmas trading has made up for
weaker football-related business in November.
The festive period saw shock defeats for several of the big name
football teams including Manchester United and Chelsea on New
Years Eve. There were also lots of draws in the Premier League which
is the best result for bookmakers as most people tend to bet on a team
winning. No fewer than ve of the seven Premier League xtures on
Boxing Day ended in a draw.
We highlighted last month (see Agenda, Shares 1 Dec 11) that William
Hills shares had been hit after a 1 accumulator football won an
individual 683,739 in November.
Shares agged the FTSE 250 rm as worth buying at 198p after
the ten Premier League matches on the weekend of 2627 November
resulted in four draws. The stock, a running Shares Play of the Week now
trades at 205.7p and should advance further on the trading update.
Bookmakers are getting ready for a busy sporting calendar in 2012,
led by the Olympics and UEFA European football championships.
William Hill last week (5 Jan) agreed to sponsor the FA Cup.
Shares says: BUY William Hill at 205.7p.
Fenner belting along
Hills prots to
climb amid spate of draws
AUD/CHF
GBP/INR
USD/PLN
EUR/HUF
USD/INR
AUD/JPY
GBP/EUR
AUD/HKD
GBP/CHF
AUD/NZD
%
%
West
Texas Intermediate
Butane
Palm Oil
Naphtha
Palladium
Brent
Jet Kerosene
Corn
Copper
Soyabeans
0 2 4 6 8 10
9.3% (0)
8.1% (1)
7.8% (3)
7.7% (0)
7.4% (-3)
6.6% (-1)
5.4% (1)
4.7% (-1)
4.1% (3)
3.9% (-1)
0 5 10 15 20 25
8.2% (4)
6.6% (-6)
4.4% (-5)
4.4% (2)
9.3% (4)
9.7% (2)
10.1% (5)
10.1% (3)
12.7% (1)
23.7% (0)
TOP 10
Forex
movers
TOP 10
Commodity
movers
TOP TEN %* CHANGE***
Denmark 16.6 2
Argentina 15.0 27
Indonesia 13.5 9
Ireland 13.4 -3
Norway 12.7 2
Brazil 12.0 4
Russia 11.3 15
Mexico 11.2 -3
USA 10.0 -5
Netherlands 9.1 -8
BOTTOM TEN %* CHANGE***
Hungary -2.9 -18
New Zealand -3.4 1
Italy -3.7 -9
Spain -4.3 -7
Bangladesh -4.6 2
Portugal -6.0 -1
China -8.3 -1
Turkey -10.5 0
Greece -16.1 1
Vietnam -20.1 -1
TOP TEN EPIC %* CHANGE***
Ashtead AHT 61.0 0
bwin party digital entm. BPTY 51.8 1
Weir WEIR 40.2 2
Hunting HTG 36.0 10
Ophir Energy OPHR 34.5 130
Imagination Technologies IMG 32.7 1
Oxford Instruments OXIG 30.5 25
Kenmare Resources KMR 29.8 -6
Fenner FENR 29.0 1
Wolseley WOS 28.1 -6
BOTTOM TEN EPIC %* CHANGE***
Tullett Prebon TLPR -24.6 -8
Cape CIU -27.5 2
Kesa Electricals KESA -28.0 -11
Man EMG -30.7 -3
International Personal Finance IPF -32.9 -62
Admiral ADM -32.9 0
Homeserve HSV -35.0 0
C&W Worldwide CW. -35.1 1
Ocado OCDO -35.5 -1
Essar Energy ESSR -36.6 -5
Global indices FTSE 350**
Dan Coatsworth
*All data based on rolling three months to 6 Jan. **FTSE 350 excludes Equity Investment Instruments and Nonequity Investment Instruments.
***Second column refers to change in rolling three-month ranking over previous seven days.
Royston Wild
JUL AUG SEP OCT NOV DEC
260
280
300
320
340
360
380
400
420
440
FENNER
FTSE ALL SHARE INDS ENG
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
The numbers that matter
SPREAD BETS, CFDs and FOREX. Now on DealBook for iPad.
When trading CFDs, Forex and Spread bets, it is possible to lose more than your initial deposit.
Download today free from the App Store. Visit gftuk.com/ipad or call 0800 358 0864 TAP INTO GFT
GFT Global Markets Ltd. is authorised and regulated by the Financial Services Authority. 2012 Global Futures and Forex, Ltd. All rights reserved. CD03UK.213.010612 Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. facebook.com/gftmarketsuk twitter.com/gftuk
6535_GFT_SM_quDPS_410x40_TAP_iPAD_AW.indd 1 09/01/2012 18:47
Source:
RESULTS
COMPANY EPIC
Tuesday 17 Jan
interim
C&C CCR
IG Group IGG
Wednesday 18 Jan
interim
African Barrick Gold ABG
Thursday 19 Jan
NCC NCC
AGMS/EGMS
Friday 13 Jan
Beowulf Mining BEM
Bellway BWY
Monday 16 Jan
Superglass SPGH
Vimetco VICO
Tuesday 17 Jan
European Investment Trust EUT
Wednesday 18 Jan
Character Group CCT
Diploma DPLM
Enegi Oil ENEG
Lowland Investment Company LWI
Majedie Investments MAJE
Planet Payment PPT
Tracsis TRCS
Thursday 19 Jan
Boomerang Plus BOOM
Urals Energy UEN
Friday 20 Jan
Aberdeen Asset Management ADN
Advanced Power Components APC
TRADING STATEMENTS
Friday 6 Jan
Caledonia Investments CLDN
Robert Walters RWA
Monday 9 Jan
Persimmon PSN
XP Power XPP
Friday 13 Jan
Centaur Media CAU
Clarke (T) CTO
Spectris SXS
Monday 16 Jan
Abcam ABC
Bovis Homes BVS
Tuesday 17 Jan
Burberry BRBY
C&C CCR
Dixons Retail DXNS
Experian EXPN
Record REC
Rio Tinto RIO
Wednesday 18 Jan
Diploma DPLM
Man EMG
Hochschild Mining HOC
Wetherspoon (JD) JDW
Tullow Oil TLW
Thursday 19 Jan
Associated British Foods ABF
Aberdeen Asset Management ADN
ASOS ASC
Kesa Electricals KESA
Premier Oil PMO
SABMiller SAB
William Hill WMH
Friday 20 Jan
Close Brothers CBG
X5 Retail Group FIVE
EXDIVIDEND
Wednesday 18 Jan
Artemis Aim Vct 2 AAM 2.0p
ACM Shipping ACMG 3.15p
Ashtead AHT 1.0p
Cardi Property CDFF 9.0p
Consort Medical CSRT 7.0p
Caterpillar CTA $0.46
CareTech Holdings CTH 4.0p
Imperial Tobacco IMT 67.0p
QinetiQ Group QQ. 0.9p
ECONOMICS
Friday 13 Jan
UK
PPI Input m/m
PPI Output m/m
EU
Trade Balance
US
Trade Balance
Import Prices m/m
Monday 16 Jan
UK
Rightmove HPI m/m
EU
Italian Trade Balance
JP
Household Condence
Tuesday 17 Jan
UK
CPI y/y
RPI y/y
CBI Industrial Order Expectations
EU
German ZEW Economic Sentiment
CPI y/y
Wednesday 18 Jan
UK
Unemployment Rate
EU
German PPI m/m
US
PPI m/m
Crude Oil Inventories
Thursday 19 Jan
EU
Current Account
ECB Monthly Bulletin
US
Unemployment Claims
CPI m/m
Housing Starts
Philly Fed Manufacturing Index
Natural Gas Storage
Friday 20 Jan
UK
Retail Sales m/m
BBA Mortgage Approvals
EU
French Flash Manufacturing PMI
German Flash Manufacturing PMI
Consumer Condence
US
Existing Home Sales
JP
All Industries Activity m/m
BUY INDUSTRIAL CONTROLS and
instrumentation supplier Spectris (SXS) at
13.41 ahead of tomorrows (13 Jan) trading
update for the year ending December 2011.
The 1.5 billion cap is expected tell investors
it continues to enjoy decent pricing power that
in turn is allowing the group to improve gross
margins. Investors should also be on the look
out for comments suggesting improved sales
visibility in 2012 across many of its markets,
particularly mining and the power and
petrochemicals industries. This could lead to a
new wave of forecast upgrades.
While the bulk of the 1.1 billion of forecast
2011 revenues come from slow-growth
developed economies, such as North America,
Europe and Japan, the emerging arenas of
Latin America, China and South-East Asia
are likely to oer stellar progress. Sales here
should be bolstered by the UK groups $475
million (308 million) purchase of privately-
owned US peer, Omega Engineering (15 Aug).
While the Omega deal beefs up Spectris
Industrial Controls division, the acquisitions
Steven Frazer
Spectris in control of its destiny
1000
1100
1200
1300
1400
1500
1600
1700
SPECTRIS
FTSE ALL SHARE ELTRO/ELEC EQ
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
D I A R Y D I A R Y D I A R Y D I A R Y D I A R Y D I A R Y
extended reach in to Asia is the key focus,
especially as Spectris had previously generated
just 12% of its business there. Evidence Omega
is maintaining steady growth in its own US
backyard, strengthening its position in China
and improving cash conversion would be
welcome positive signs.
Panmure Gordon expects the group to
report a 58% rise in pre-tax prot to 189
million for 2011 and then predicts further
advances of 12% and 9% to 211 million and
229 million for 2012 and 2013 respectively.
If those gures prove accurate a prospective
price/earnings ratio (PE) for 2012 of just 10.2
looks good value and the broker has a 17.20
target on the shares, for 28% upside.
Spectris will publish full-year results on
17 February.
Shares says: BUY Spectris at 13.41.
GREAT
value
STOCKS
COVER STORY
COVER STORY
GREAT
value
STOCKS
I
ts a deal, its a steal, its sale of the century. We are
all pretty much conditioned to try to get the best
deal possible, whether it be going to the cheapest
supermarket for the weekly shop, a discount on a
new suit, or 1,000 knocked of that shiny new car.
The same rules apply when it comes to shares too.
Admittedly, you cannot exactly haggle down their
price - even if its workings may look Byzantine at
times the stock market is not, after all, a Turkish bazaar.
But the January sales are not just for shoppers and retailers
- there are bargains to be had for investors too. Valuation
alone will not drive a share price in the long run but history
suggests the best, and most consistent long-term returns,
come from the value investing approach. Just as the market
can over egg matters on the way up, it can at times become
excessively depressed and leave some frms looking seriously
underloved, underrated and undervalued in the short term.
Last years catalogue of trouble and strife caused by the
eurozone debt crisis, revolutions, riots and recessionary
threats may have left many investors dizzy. But the smarter
players will be the ones sifting through the debris for those
diamonds in the dust, the babies thrown out with the
bathwater. Shares can get your 2012 of with a bang by giving
readers a head start over the herd.
We have put together several simple trading strategies that
can help you spot your own bargains, but we have also put
together a list of 10 companies whose shares look ripe for
a re-rating based on some simple valuation metrics. These
include a price/earnings growth (PEG) ratio of less than
one, a forward dividend yield of at least 2.5% (some 20%
above that of 10-year Gilts) and good prospects for positive
earnings growth - advancing profts in this low-growth
macroeconomic environment would be no mean feat.
Our rigorous screens have thrown up a number of
companies that regularly feature in Shares, including social
housing repairs and maintenance specialist Mears (MER),
document management IT frm IDOX (IDOX:AIM),
stamp trader Stanley Gibbons (SGI:AIM) and plastics
and packaging group RPC (RPC) . Our investment criteria
have also fagged up a few surprises, such as DIY retail giant
Kingfsher (KGF), IT services suppliers Computacenter
(CCC) and Phoenix IT (PNX), global motor and aircraft
engineer GKN (GKN), travel agent Hogg Robinson (HRG)
and South Africa and Mozambique gold miner Pan African
Resources (PAF:AIM) .
Never diferent this time
No two catastrophes play out in exactly the same way but
there are usually plenty of lessons to be drawn from past
While the economic and market outlook
may be uncertain for 2012, some simple
number crunching should mean Shares
readers can beat the herd by digging out
the UK equity markets best bargains.
Steven Frazer investigates.
events. Take the most recent big stock market implosion
during the banking crisis of 2008, when the FTSE 100 index
collapsed in spectacular fashion. Falling from 6,416 at the
start of 2008 to lows of 3,700, it then bounced sharply to
fnish the year at around 4,600, for a net overall decline of
29%. Yet even the rally into early 2009 was not the end of the
shocks, as renewed investor pessimism plunged UK equities
back into steep decline, eventually fnding a foor at 3,512 in
early March of that year.
What happened next took almost everyone by surprise.
While the stock market Cassandras continued to envisage
prolonged famine for UK equity punters, quite the opposite
developed, as investors feasted on a bounce back to 5,412
by the end of 2009. In the two years since then, the FTSE
100 has plunged back below 5,000 and ridden the crest of a
6,000-plus wave, only to leave us back where we started.
So what are reasonable expectations from the FTSE 100
index and the overall UK stock market in 2012? According to
recent surveys, higher than the 5,572.3 level at which it closed
2011. A study conducted by the Times newspaper of average
forecasts from 10 leading market commentators suggests the
UKs blue-chip index could rise by as much as 8% this year,
which would mean closing out 2012 at over 6,000. A separate
survey of eight brokers fags a December close of 5,783 for the
FTSE 100, 3.8% up, while Shares own FTSE 100 predictions
call for an end of year 2012 level of 5,542 (see Shares, 22
Dec 11), implying a basically fat year, although this data
alone fails to refect the sweeping swing between our most
pessimistic prediction (4,750) and most optimistic (6,200).
Think about the future
Without the beneft of 20/20 foresight the challenge for any
of us who attempt to predict the future is that few, if any, of
us are not much good at it. That is not surprising given the
multitude of factors equity markets face in determining their
direction through the year; geopolitical, macroeconomic,
monetary, risk, valuation, momentum, sentiment, the list
goes on. Steve Keeling, head of research at stock broker
Singer Capital Markets admits despite best endeavours,
the reality is that many market analysts are not skilled at
pricing risk, even worse at market timing and are prone
to misreading sentiment surrounding macro events. It is
perhaps worth noting that, for the frst time in 15 years, stock
market historian David Schwartz has refused to make a
end of year FTSE 100 prediction because he simply cannot
see through the volatility. Investors are very frightened
and sudden news is spooking them and they are reacting
instantaneously and violently and we are set for more of
2008 2009 2010 2011
3000
3500
4000
4500
5000
5500
6000
6500
FTSE 100
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

COVER STORY
the same, he says. The market is no longer moving on economic
fundamentals - it is moving on political action or inaction, making it
very difcult to predict.
Yet many stock market professionals believe UK shares are cheap
by current valuation metrics compared to historic averages. Analysts
at stock broker Charles Stanley calculate the UK equity market is
currently trading on a price/earnings (PE) multiple of 9.2, based on
earnings estimates for 2012, against the long-run average of nearer
15. Singer Capital Markets makes the 2012 PE even cheaper. The
UK equity market appears to be trading on around 8.5-times forward
earnings, says Singers Steve Keeling, which is no doubt cheap by
historical standards. At this rating it is likely the market may already
be discounting further pressure on earnings, the brokers head of
research says.
Average payout yields, or the percentage paid out to investors
relative to buying the underlying asset, also appear favourable. It is
typically considered a buying signal when equity yields outstrip the
income paid on Gilts, or government bonds. UK equity yields typically
traded at around 3.5% through 2011 yet Charles Stanley estimates the
current forward yield at 4% today. The yield on typical 10-year Gilts is
2.02% at the time of writing, although it is arguable bond yields remain
forcibly depressed due to the Bank of Englands second, 75 billion
quantitative easing programme (QE-II).
Spot the bargains
As an investor, one useful skill is to identify companies that are
undervalued before everyone else discovers their attractions. But
while the market uses a number of commonly accepted techniques,
valuing a company remains highly subjective. Often it comes down to
a matter of opinion. Nevertheless, there are a number of ways to assess
the value of a company and to draw up our list of eight undervalued
names, we have used three key screens:
Price/earnings ratio (PE) . The price/earnings ratio (PE) is
commonly used to assess the level of confdence investors have in
a company. The PE is simply the share price divided by the after-
tax earnings per share (EPS). Alternatively, you can take a shortcut
and simply divide the market capitalisation by forecast net income.
The latter approach highlights what the PE actually measures the
number of years it will take a company to accrue profts equivalent to
its market cap. Most investors use the ratio as a yardstick by which to
measure current and also future earnings power. By comparing PE
ratios between companies and across business sectors, investors hope
to identify undervalued stocks. A lofty PE indicates investors have a
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
2
3
4
5
6
7
8
FTSE 100 - DIVIDEND YIELD (LHS)
UK GOVT. BOND SERIES 10 YEAR (RHS)
Source: Thomson Datastream
A
great way of developing your
own stock picking strategy is
to base it on somebody elses
successful technique. Below we
list seven great investors whose investment
philosophies can be used as a foundation for
your stock market ventures.
Benjamin Graham is widely regarded
as the grandfather of value investing. His
books, Security Analysis and The Intelligent
Investor , marked him out as a pioneer of
the concept of making money through
undervalued shares. Co-authored with
David Dodd and published in 1934, Security
Analysis is an epic tome, describing in
detail how to analyse a companys fnancial
statements. The Intelligent Investor is the
book for which Graham is most well known
and the text remarkably remains as relevant
today as it was upon publication way back
in 1949.
You could say Philip Fisher was the stock
markets frst technology investor. Originally
published in 1958, his book, Common Stocks
and Uncommon Profts broke new ground
in explaining how investors could judge
fast growing, innovative companies. Fisher
famously used his techniques to pinpoint
the likes of Motorola (MOT:NYSE) and
Texas Instruments (TXN:NYSE) as far back
as the 1950s, two stocks that registered
substantial gains over the following decades.
Arguably the greatest investor ever,
Warren Bufett has earned a $30 billion
fortune making him one of the worlds
richest men. Bufetts reputation has
been enhanced over the years by his
annual letters to shareholders, writing to
the investors in his investment vehicle,
Berkshire Hathaway (BRK.A:NYSE). Freely
available to all, the shareholder letters
outline the investment strategy that has
served him well for over 30 years, as well as
making entertaining reading.
Some professional fund managers sufer
from a poor reputation but a few stand
out and Peter Lynch is certainly one that
does. Lynch ran the Fidelity Magellan Fund
between 1977 and 1990 with startling
success. Anybody putting in 1,000 when
Lynch took control would have seen the
investment balloon to 28,000 by the time
he retired. The techniques that helped Lynch
record the near 30% per annum return are
encapsulated in his three books, the best of
which is probably One Up On Wall Street .
Jim Slater is probably the UKs most well
known private investor. Published in 1992,
his book The Zulu Principle was the frst that
presented British investors with a specifc
stock market strategy. Alongside refnements
published in the follow-up, Beyond The Zulu
Principle, Slater also helped create REFS
(Really Essential Financial Statistics), a
system designed to for stock picking.
Legendary stock picker Sir John
Templeton was frst to spot the potential
of emerging markets. Having seen it all,
done it all, investors will always fnd solace
with Sir Johns open-minded and contrarian
beliefs. Although Sir Johns eforts are now
largely devoted to philanthropy and the
funding of various scientifc studies and
theological pursuits, his record and thoughts
have survived the test of time. Anybody who
invested $10,000 in the Templeton Growth
fund at its inception in 1954 would have
seen it turn into $4 million by 1992.
Learn from the best of the best
79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 79205_gbr_smb_jan_3b_4c_pcp_fp205x270_shares_final3.indd 1 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM 1/5/12 5:58 PM
COVER STORY
high level of confdence in a companys future potential. But
while a company with a high PE ratio relative to its sector
may have exciting growth prospects, it might equally be
considered to be overvalued depending on prevailing market
circumstances. So while PE can be a useful measure of a
companys value, it should also be treated with caution.
PE ratios vary dramatically between sectors. At the peak
of the technology bubble in 2000 it was fairly common
for companies to command huge valuations even though
they were making enormous losses. A negative PE tells
you no more than that the company is in the red. Like most
performance indicators, the PE works best if it is monitored
over a length of time. That way it is possible to discern a trend
rather than relying on a snapshot of a given moment.
The PEG ratio . In some brokers research you may come
across the PEG ratio, which measures price/earnings growth.
Popularised by successful investor Jim Slater this metric
measures the relationship between a shares PE ratio and
its earnings growth rate. The faster a companys expected
earnings growth, the faster its PE will fall, assuming its share
price remains static. To calculate PEG, simply divide the
PE by the stocks forecast EPS growth rate. A PEG rating of
between zero and one suggests the company is cheap relative
to its growth prospects and implies the shares may be due an
upwards re-rating. PEGs higher than one would suggest the
valuation fully refects the likely EPS growth. A PEG of less
than zero is meaningless and should be ignored.
Book Value . At the simplest level, a company is worth
the value of its assets minus its liabilities - its book value
(BV) or net asset value (NAV). Book value is the amount
of money that would be available to shareholders if the
companys assets (excluding intangibles such as copyright
and patents) were sold at their balance sheet value and
all liabilities were paid. For example, if assets equal 100
million, while liabilities are 60 million, then the companys
book value is 40 million.
NAV is often expressed in per share terms, which is
calculated as net assets divided by the number of shares
in issue. The share price is then divided by NAV or BV per
share to provide the price-to-book or P/NAV ratio. This is
often a frst point of call when looking for potential takeover
targets. If the market value of a company, or its share price
is lower than its book value or book value per share then, in
theory, a buyer could take control and sell the companys
assets for more than it paid. This was a key theme during
the heyday of the asset-strippers in 1970s and 1980s. In
some cases, a company will deservedly trade at a discount
to book, should its assets be falling in value, illiquid, difcult
to value or subject to a tax liability if they are sold. It may
also be unrealistic to assume the value of a company asset
on the balance sheet equals the price it would fetch if it
were to be sold of, especially when dealing with intangible
assets, such as patents and brands. Even so, a big discount
to asset value is often a good start when it comes to panning
for hidden gems.
Catalyst needed
But valuation itself is never alone to get a share price moving.
An expensive stock can stay expensive for a very long time
if it keeps delivering strong earnings momentum or profts
M
ost investors will want
to stamp their own
personality on their
share picks and this is
easily done with a decent selection
tool, perhaps those available on
our sister website www.moneyam.
com, Sharescope or REFS Online,
for example. But there are a number
of common and simple investment
styles and tactics that can help you
bridge the gap from investment
hopeful to successful share trader.
Bargain hunt
So-called value investing is all
about spotting shares that are
being unfairly discounted, or
ignored altogether, by the market.
The idea is you buy the stock
while it is going cheap in the hope
others will eventually recognise its
underlying attractions and follow
you in, sending the shares shooting
higher and making you a tidy proft.
The trick is how to make sure you
are indeed looking at a bargain
rather than shop-damaged goods
and the secret here is thorough
research. Take a long hard look at
the companys fundamentals and
several of the key valuation metrics
ratios, such as price/earnings (PE),
price-to-book value (P/BV), and
dividend yield, for example, as well
as operational benchmarks such as
gross and operating margin, interest
cover, free cashfow conversion
and earnings growth. One of the
main benefts of value investing
is it should be relatively low-risk.
Because a stock is already trading
on a depressed rating, the downside
will be pretty limited but the upside
could be signifcant. It can take a
lot of time and efort to unearth
good, undervalued plays, but if you
are willing to put in the work, the
rewards can be spectacular.
Go against the grain
Doing the opposite of what most
other investors are doing is counter-
intuitive and therefore takes
considerable discipline. A so-called
contrarian investor ignores market
trends and buys neglected and
depressed stocks of well-managed
companies, in a manner similar to
the value chaser. The contrarian
tends to look for strong trends in
the market and take an opposing
view, buying shares in what he
believes to be healthy companies
stuck in unpopular industries. The
idea is that as unpopular share prices
fall they become more attractive
than rising ones and, with patience
and a bit of luck, in time this will
reverse. And by buying out of favour
shares, the contrarian can ride the
subsequent uptrend, as they regain
popularity, from much closer to
the ground foor. Shares on low
multiples of sales, earnings and
NAV are particular favourites with
contrarians, although care is needed
to make sure the lowly valuation is
Investment styles to suit all tastes
that are better than expected semiconductor intellectual property leader
ARM (ARM) (see The Oracle, page 36) is an excellent case in point here.
Equally a cheap stock can be a cheap stock for a good reason and stay
that way if its faults are not rectifed. Premier Foods (PFD) may at frst
sight look like a fnd on a prospective PE of barely three for 2012, but the
frms crushing debts mean its prospects are bleak. Equally, a lowly PE
may be the market telling you the earnings forecasts are too optimistic
particularly in the case of a highly operationally geared cyclical stock
the balance sheet is wrecked, the strategy is fawed and management
incompetent, or a combination of the above.
As such the value hunter must fnd not only a stock that looks good
value, but is fnancially robust and capable of providing a catalyst that
helps persuade the market the shares are cheaper than they should be.
Such a wake-up call can come from better-than-expected earnings, a
change in management, a strategic review, key disposal or acquisition, a
major restructuring programme or debt refnancing. Without some new
COVER STORY COVER STORY
350
400
450
500
550
600
650
700
ARM HOLDINGS
FTSE ALL-SHARE
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
not well deserved owing to some
serious operational, strategic or
fnancial faw. Contrarians need
to look particularly closely at a
companys balance sheet to ensure
fnancial stability, and check out
managements strategy if they
are to spot companies that can
genuinely survive through a
potentially prolonged spell in the
doldrums ahead of a return to
fashion.
Go with the fow
Momentum investing is the
complete opposite of the
contrarian approach but it can be
equally successful. Momentum
punters buy in to frms with
consistently rising earnings
forecasts or even just consistently
rising share prices in the belief
they can ride the tide and then
move on. Valuation is rarely, if
ever, a consideration. This may
sound like a dangerous strategy,
and it can be, but it can also
deliver impressive returns for the
simple reason that momentum
tends to last a lot longer than
you might expect. A share does
not become a 10-bagger without
frst doubling in value. So while
making twice your stake would
represent a storming success, it
might mean missing out on the
best of the rise. As a rule investors
try to buy low, sell high, but
momentum investors go a step
further, buying high in the hope
of selling higher. They therefore
risk losing more money than other
types of investor, although the
returns over a short spell, maybe
three, six or 12 months, can be
spectacular. As a longer-term
strategy, however, the risks may
outweigh the possible rewards.
Go for growth
Perhaps the most common
strategy used by retail punters,
growth investing entails selecting
shares in companies whose sales
and earnings are expected to
grow substantially in future. The
idea is that as earnings grow, so
the share price should follow.
Usually investors will target smaller
companies that look capable of
becoming much larger ones, frms
that have shown good growth in
the past but with the ambition and
prospects to continue to do so.
There is also the chance of
the earnings growth/re-rating
double-whammy. For example,
shares in ABC plc are currently
worth 100p. Historic earnings per
share (EPS) are 10p. The company
is growing its earnings at around
30% a year, and the shares trade
on a PE of 10. In theory, just
keeping the PE at 10 would mean
a 30% hike in the share price over
the next year, to 130p (10 times
the next years 13p EPS fgure).
However, since it is growing fast,
the market may decide that a PE
of 12 is more realistic over the next
12 months. So 30% EPS growth
plus a re-rating of the PE from 10
to 12 would imply the 100p share
price soaring to from 100p to
156p (12 times the 13p of earnings)
for a very tasty 56% proft. On
the whole, growth investing is
designed for people willing to
take a medium or longer-term
view and the system will not often
work overnight. But by hunting
down modestly-priced shares in
fast growing companies, you can
limit your risk as well as tapping
into potentially high returns.
The quest for income
Dividends do not usually register
on the radar screens of short-
term investors. An attractive yield
of 5% is still 5% in your pocket
but yields are often applied to
shares where growth prospects
are limited. Shares of most
utility frms tend to uniformly
sport chunky dividend yields but
similarly, as heavily regulated
businesses, most are expected to
deliver little more than low single-
digit earnings growth, although
the two measures can combine
for a reasonable return. For
example, a 5% rise in the share
price over a year is pretty dull but
if added to a 5% yield as well, an
investor would get a double-digit
total shareholder return (TSR).
That is way better than the bank
will give you and useful protection
from the ravages of infation.
But the real added value
of dividends comes over the
long-term and the next 10, 20,
30 years or more. It is over
this sort of investment horizon
that the eighth wonder of the
world compound interest -
comes in to play, and that can
make a massive diference to
your portfolio performance. For
example, imagine you invested
5,000 in ABC plc at 100p each,
and it rose 5% every year for 10
years. At the end of the period
your 5,000 would now be worth
8,140, for a 62.8% gain. Now
try that with XYZ plc, assuming
the same amount invested at
the same share price, but with
a 5% dividend yield on top. In
this instance your 5,000 would
have grown to 12,965. And the
really interesting point is that in
the case of XYZ the dividends
produce a greater portfolio proft
than the capital gain. We know
this because the capital gain
would be the same in both cases
- 3,140 over 10 years. However,
if we take the XYZ plc total return
of 12,965, subtract the original
investment (5,000) and take
away the capital gain (3,140) you
are left with 4,825. That is a third
more earned by the dividends
than from the capital.
Investment styles to suit all tastes
event to change perception of the frm, its shares could stay cheap and
neglected for a very long time.
Our fourth and fnal criteria when seeking out value plays is
therefore momentum, in terms of sales and earnings. Valuing
established companies is difcult enough, but valuing start-up
companies is trickier still. Typically, most fedglings make losses for
several years, yet many nascent tech frms, for example, can have huge
valuations and they often get this because they are showing rapid
topline growth that should eventually turn in to proft and cashfow
generation when the company hits critical mass.
There are certainly plenty of mixed signals as to the future
direction of stock markets, not just here in Britain, but across the
globe. That said, seeking out ignored, unloved and sometimes simply
misunderstood names means you are already dealing with companies
of which the market has low expectations, and this should limit
the downside risk to your investment even if some of the gloomier
FTSE 100 predictions prove correct. On the other hand, the cautious
nature of consensus forecasts for 2012 increases the chances of
outperformance, as it may take relatively little to surprise on the
upside and provide a feelgood factor. Buying a select portfolio of value
picks now may not bring instant profts but it could reap hefty rewards
given a bit of time as they start to enjoy a re-rating.
Computacenter (CCC) 345p
Market cap: 528.7 million
PEG: 0.73
Dividend yield: 4.8%
We fagged up Computacenter (CCC) as great value just last week (see
Databank, Shares, 5 Jan) ahead of what should be a positive trading
update from the pan-European IT services supplier due out today (12
Jan). Hardware sales have been under pressure, particularly in the UK,
yet Computacenter has also been trading strongly in Germany, thanks
to the nations robust manufacturing base, and in France. Recurring
managed services sales, up 6% to 570 million at the half year, is also
building nicely. A trend for IT vendors to break up large IT services
projects into smaller pieces means Computacenter has a chance to
compete with and beat the sectors heaviest hitters to such business,
as shown by its recent spate of contract wins. Last years free cashfow
yield of over 14% shows Computacentre throws of lots of cash and
that supports
consensus
estimates for a
divided-per-share
payment of 16.6p
for a 4.8% yield. A
prospective price/
earnings ratio of
barely eight times
also gives a price/
earnings growth
(PEG) ratio of just 0.73 when consensus forecasts of 10% earnings per
share growth are taken in to account. (SF)
GKN (GKN) 190.5p
Market cap: 3.0 billion
PEG: 0.61
Rising global car demand over the coming years should continue to
boost engineering giant GKN (GKN) , whose shares appear hugely
undervalued as macroeconomic concerns weigh down the automotive
sector. The 3 billion cap whose 2011 full-year results are due next
month (28 Feb) reported double-digit growth in auto business
revenues in its latest interims (19 Oct), while its aerospace division has
continued to make strides on the back of promising civil demand. The
FTSE 100 constituent is also broadening its operations in Asia in an
efort to tap into growing auto of-take from emerging markets. Broker
consensus expects 2012 full-year results to show earnings per share
(EPS) growth of 16%
to 24.6p and that
leaves the shares
trading on a PE ratio
of 7.7 times. An
anticipated 30% hike
in the dividend to
8.4p implies a juicy
4.4% yield. (RW)
Hogg Robinson (HRG) 57.9p
PEG: 0.67
Corporate travel expert Hogg Robinson (HRG) should prove more resilient than one might
imagine in the current economic climate. It gets paid for arranging travel and its fee is not based
on whether the customer opts for premium or economy. So if investment bankers are told they
have to stay in cheaper hotels or not fy business class, it should not matter to Hogg Robinson
as long as the travel is still happening. Half-year results (30 Nov 11) showed a 13% rise in client
travel spend and a 7% increase in transaction activity. The frm generates strong levels of cash
fow. Stockbroker Collins Stewart reckons Hogg Robinson can progress sales at between 4%
and 6% through tougher economic times, driven by general growth in travel spend with existing
customers and winning new business. (DC)
1
3
2
300
320
340
360
380
400
420
440
460
480
500
COMPUTACENTER
FTSE ALL-SHARE S/W & COMP SVS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
30
35
40
45
50
55
60
65
70
HOGG ROBINSON GROUP
FTSE ALL-SHARE SUPPORT SVS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
150
160
170
180
190
200
210
220
230
240
250
GKN
FTSE ALL-SHARE AUTO & PARTS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
COVER STORY
BUY BUY
BUY
COVER STORY
4
10
12
14
16
18
20
22
24
26
28
IDOX
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
210
220
230
240
250
260
270
280
290
KINGFISHER
FTSE ALL-SHARE GEN RETAILERS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
200
220
240
260
280
300
320
340
MEARS GROUP
FTSE ALL-SHARE SUPPORT SVS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
IDOX (IDOX:AIM) 25.5p
PEG: 0.14
Document management software specialist IDOX (IDOX:AIM) continues to expand a core public
sector client base into corporates following several acquisitions over the past 12 months. Those
deals have opened up new markets such as construction, engineering and natural resources as
well as building steady overseas sales. This shift has already started to ease investor concerns of
the possible impact of public sector spending cuts on IDOXs revenue, even if they were largely
overplayed in the frst place. This was illustrated by the 14% increase in public sector revenues in
the year to 31 October (14 Dec 11). With analysts predicting pre-tax proft to rise close on 30% this
year to 13.5 million, a PE of nine and dividend yield of 3.0% looks a bargain price for a business
putting up solid organic growth despite the difcult economic backcloth. Such a lowly rating could
even attract a predator. (SF)
Kingfsher (KGF) 247p
Market cap: 5.9 billion
PEG: 0.87
Home improvement
retailer Kingfsher
(KGF) , behind the
B&Q and Screwfx
brands as well as
Frances Castorama
and Brico Depot, is
delivering profts
growth and market
share gains amid
tough times for the European consumer. Chief executive ofcer
Ian Cheshire is driving through self-help initiatives and overseeing
geographic expansion at the 5.9 billion cap, which now generates
two-thirds of profts from outside the low-growth UK. While hefty
exposure to the faltering French economy presents near-term problems,
Kingfsher ofers investors access to a compelling developing economic
narratives across nations such as Poland, Russia and China. Forecast to
grow earnings 17% to 24.3p by January 2012 and a further 10% by 2013,
Kingfsher trades on an undemanding forward multiple of 10.2 falling
to 9.3 next year. That rating refects negative sector sentiment and
discounts Kingfshers strong international growth opportunity. (JC)
Mears (MER) 214p
PEG: 0.64
Social housing repair-
to-care services
group Mears (MER)
is targeting 10%
annual organic
growth and boasts
exceptional earnings
visibility, a strong
balance sheet and
defensive income
streams. Do not be put of by last years proft warning (10 Nov 11) as
this only applied to a potential new income stream and was not related
to its core business. Government plans to cut solar power subsidies have
delayed plans to enter the fuel poverty-related market. For now, the
focus returns to the core business of fxing social housing and domestic
care services. Both these markets have defensive qualities. Care, in
particular, is a growing industry as people live to an older age and the
government pushes for more assistance in the home. (DC)
5 6
COVER STORY
BUY BUY
BUY
Pan African Resources (PAF:AIM) 15p
PEG: 0.15
A rarity among gold miners in paying a dividend, South Africa-based
Pan African Resources (PAF:AIM has an attractive growth profle.
Earnings will be boosted in 2012 from the frst full years contribution
from its Phoenix project in South Africa. This is a processing facility that
will recover platinum, palladium, rhodium and gold from waste material
obtained from nearby mines. The Bramber gold tailings project should
start to produce gold ounces from 2013. Output from the companys
fagship mine,
Barberton, is likely
to remain fat in
2012 at around
95,000 ounces
of gold, providing
solid cashfow for
the company. The
Mozambique-based
Manica gold project
is being spun out
into a separately-listed vehicle, freeing up management time to seek
other growth opportunities. (DC)
Phoenix IT (PNX) 159.25p
PEG: 0.88
After two torrid years technology solutions specialist Phoenix IT
(PNX) is fnally showing more encouraging signs following last Julys
management change. A major overhaul sees the Northampton-based
company re-organised into fve separate parts; Hosting, Business
Continuity, Managed Services, Networks and Partner Services, aimed
at better exploiting opportunities in key areas. Full details of the
business shufe will come early this year but limited or no growth is
already factored in
to forecasts, while
the strong cashfows
and near three-times
dividend cover mean
on income alone, the
shares could be in for
a decent rerating
through 2012. Broker
Investec insists the
shares could hit
250p at some point this year, implying almost 60% upside, a process
that could start with Februarys expected trading update. (SF)
RPC (RPC) 365p
PEG: 0.8
Plastic packaging specialist RPC (RPC) is expanding into new
geographical territories following the acquisition of European rival
Superfos in February 2011. The transaction has created welcome
cost synergies which have coincided with a long-awaited reduction
in raw material prices. RPC has attractive defensive qualities as it
makes everyday
household items
which tend to be
bought regardless
of economic
conditions. These
include ketchup
bottles, margarine
tubs and liquid soap
dispensers. RPC
stands above the
competition with
its ability to design bespoke products for clients, essentially becoming
their research and development arm for new ways of storing items. This
is evident in new products that are lighter than traditional packaging or
even improve the shelf life of food items. (DC)
Stanley Gibbons (SGI:AIM) 170p
PEG: 0.94
Resilient earnings growth, progressive dividend payouts and
considerable asset backing underpin the investment case at stamp
dealer Stanley Gibbons (SGI: AIM) , swapping hands for less than
10-times Peel Hunts 18.9p earnings estimate for 2012. The broker,
which has pencilled in 16% growth in taxable profts to 5 million for
calendar 2011 ahead
of a further 8%
advance to 5.4
million in 2012,
believes Stanley
Gibbons renowned
brand name should
help it penetrate
overseas markets
such as the US and
also China, where
appetite for philatelic
dealing becomes ever-more voracious. Forays into collectibles such as
rare coins as well as a new web-based trading platform ofer additional
growth avenues for the 43 million cap, which trades at a discount to
estimated net asset value of 45.2 million, or 179p per share. (JC)
6
8
10
12
14
16
18
PAN AFRICAN RESOURCES
FTSE ALL-SHARE MINING
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
150
200
250
300
350
400
RPC GROUP
FTSE ALL-SHARE GENERAL INDS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
140
160
180
200
220
240
260
280
300
PHOENIX IT GROUP
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
130
140
150
160
170
180
190
200
210
STANLEY GIBBONS GROUP
FTSE ALL-SHARE GEN RETAILERS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Data supplied by Morningstar
7
8
9
1O
COVER STORY
BUY BUY
BUY BUY
Richard Marwood
A
fragile banking system and
sovereign debt woes continue
to worry fnancial markets even
after the welcome December
rally. Risk-averse investors may therefore
look to the distribution funds managed by
AXAs Richard Marwood and Jim Stride as
an antidote to the prevailing uncertainties.
The afable Marwood is lead manager for
AXAs two main vehicles for retail investors
in the Open Ended Investment Company
(Oiec) environment, namely the 711
million AXA Distribution fund and the
486 million AXA Defensive Distribution
fund. Both books are classifed within
the Cautious Managed sector and seek to
provide a growing income stream alongside
some prospects for capital growth over the
medium to long term.
Armed with the analytical skills honed
in securing degrees in both mechanical
engineering and aerodynamics, Marwood
tells Shares his funds, which also include the
73 million AXA Ethical Distribution Oeic,
are aimed at the cautious investor.
People feel quite defensive, says
Marwood, but there is no value in any
of the defensive assets. One example he
cites is cash on deposit, which he believes
has become an unattractive asset given
negligible interest available on savings and
the deleterious efect of infation, which eats
away at real spending power.
Get defensive
As of the end of November, 55% of the AXA
Distribution portfolio lay in UK equities
while index-linked gilts, conventional gilts
and cash represented 35%, 7% and 3%
respectively. That left the fund overweight
in index-linked gilts and equities and
underweight in conventional gilts.
As its name strongly implies, the AXA
Defensive Distribution Fund is even more
heavily weighted towards safe-as-houses
index-linked gilts at 55% of assets, with
UK equities representing 29% of the book,
conventional gilts 7% and cash 9%.
Marwood explains the low risk index-
linked gilts, which he points out were a
top-performing asset last year, are there
to provide the infation
protection. Primarily, we
are invested in index-linked
gilts and tend to skew our
portfolio towards
the shorter end (in terms
of maturity).
Of late, Marwood and
Stride have been running
underweight in conventional
gilts, in their funds, which
attempt to give investors
exposure to the equity market, but in a
slightly dampened down way. We are not
looking for lots of sex and violence, the
money manager explains, adding we are
looking for businesses that arent going to
fall over.
Scrutiny of the top ten across both
vehicles illustrates the point, with major
names ranging from oil and natural gas
majors BP (BP.) and Royal Dutch Shell
Bolster your defence with
dependable distributions
(RDSB) to banking
behemoth HSBC
(HSBA), drugs giant
GlaxoSmithKline (GSK)
and defensive consumer-
facing staple British
American Tobacco (BATS).
Focus on
fundamentals
Within both of his main
funds, Marwood has
recently used maturing index-linked gilts to
dribble cash into the equity markets. When it
comes to the equity portion of the portfolio,
Marwood and Stride have a disciplined
approach to stock picking. The duo looks
to purchase shares in strong companies
at attractive valuations, particularly
in situations where short-term market
sentiment has become too pessimistic.
We are not aggressive traders in stocks,
insists Marwood. We choose businesses that
we feel are fundamentally attractive and we
buy them when they are out of favour. One
key metric for which Marwood consistently
screens is gross margin, since a fat fgure
here is usually indicative of strong barriers
to entry.
Discussion then turns to specifc stocks
and Marwood explains he is presently
positive on prospects at Inmarsat
(ISAT), the FTSE 250 mobile satellite
communications services provider. This
1.9 billion cap, which late last year (2 Nov)
announced 18% revenue growth to $364
million over the quarter to September,
is a cheap, high dividend payer that also
possesses a good business model in
Marwoods opinion.
Elsewhere, he highlights the strong
franchise and yield attractions of FTSE
100 telecoms frm BT (BT.A) and says we
quite like the oil exploration and production
companies, specifcally the 1.1 billion cap
oil and gas explorer Afren (AFR). Following
our discussion, shares in the FTSE 250
resources counter gushed higher on news
(3 Jan) it had exceeded its output targets
for 2011 after ramping up production at the
Ebok feld in Nigeria.
Cautious income investors will look toward
fund facts
AXA Distribution Fund
Objective: To achieve growing income with
some prospects for capital appreciation over the
medium to long term
Fund type: Oiec
Fund size: 711.2 million
Underlying yield: 4.4%
Sector: Cautious Managed
Initial charge: 5.0%
Annual charge: 1.5%
Source: AXA Investment Managers, as at 30 Nov 2011.
EDITED BY
JAMES
CRUX
top ten holdings
Company % of portfolio
UK Treasury IL 2.5% 26/07/2016 10.2%
UK Treasury IL 2.5% 16/08/2013 10.2%
Royal Dutch Shell (RDSB) 4.2%
BP (BP.) 3.2%
HSBC (HSBA) 3.0%
GlaxoSmithKline (GSK) 2.9%
Vodafone (VOD) 2.7%
UK Treasury IL 1.875% 22/11/2022 2.4%
British American Tobacco (BATS) 2.1%
BG (BG.) 1.8%
Source: AXA Investment Managers, as at 30 Nov 2011.
Cahill's book was published, from around
5% to 2.02%, complicates the picture. But
based on our view ination and growth will
resume, we view such depressed yields as
likely to be a historical anomaly.
The ERP and RFR are the key variables
of the Capital Asset Pricing Model
(CAPM) which is the most commonly
used hypothetical framework employed
to quantify the required return for a given
level of risk.
The beta multiplier is one measure of the
risk attached to any one individual share
and is equivalent to its historic volatility.
A share which has historically perfectly
tracked the market has a beta of one. If a
share has a beta of 1.3 it will move by 1.3
times as much as any change in the FTSE
All-Share and if it has a beta of 0.7 it will
move by 70% as much as the benchmark.
UK investors holding a beta one stock
should, goes CAPM, have achieved about
the same 10% historic return as the FTSE
All-Share.
The CAPM is a handy conceptional
framework, and can be used to explain, at
needs to be compensated for by a
higher return.
Former SG Warburg equity analyst
Michael Cahill, in his book Making the
Right Investment Decisions: How to Analyse
Companies and Value Shares, suggests a 10%
annual return should be expected from
equities as a broad asset class. The 10.7%
yearly return on the FTSE All-Share since
inception in 1962 supports this proposed
gure. The 10% is roughly the sum of a 3%
to 6% 'equity-risk premium', or ERP, for UK
equities and a 4% to 5% range for UK gilts
yields. The collapse in gilt yields seen since
n investor with a long-
term time horizon
should, believes
Shares, principally be
concerned about ination. They should
not let any near-term deationary scares
divert their attention away from building an
equity-based portfolio able to out run likely
future increases in the cost of living.
This week, in the second of our four-part
series, we unveil a portfolio designed to
target an average 10% annual return over a
30-year time period. Our book of holdings
is 60% weighted toward equities because
it is tailored for an imaginary character,
Mr Long Term, who is investing for his
retirement via a Self-Invested Personal
Pension (Sipp) (see page 27).
Last week (see Cover, Shares, 5 Jan) we
unveiled the fund's cornerstone pick, Royal
Dutch Shell (RDSB). The oil giant, and
our ve other equity selections LVMH
(LVMH:PA), Nestl (NESN:VX), Unilever
(ULVR), WPP (WPP) and British Land
(BLND) each represent 10% of the
overall portfolio.
RISKREWARD BUSINESS
Since its inception in 1962 the FTSE All-
Share index has returned 10.7% a year
versus ination, as measured by the Retail
Prices Index, of 6.9%. We believe even the
most defensive of our six equity names,
food producer Nestl is capable of beating
this over time. Over the past 20 years the
conservatively-managed CHF179 billion
cap may have only grown its topline at an
average rate of 5% but it has generated
a compound annual return of 11.7% for
the patient investor who had reinvested a
steady stream of increasing dividends (see
box, right).
Last week we introduced the idea of the
'risk-free rate', or RFR, and explained how
this is most commonly taken to be the yield
on the 10-year Government gilt. Because
the UK state last welshed on its debts in
1672 investors may have condence they
will receive their semi-annual coupons and
get back their initial capital investment, or
principal, at the gilt's maturity. Investing in
any other instrument whether it be other
varieties of xed interest, or another class
of asset entirely such as equities, property,
or commodities entails taking risk which
WHY SWISS CHOCOLATE IS PURE GOLD
MARKETBUSTING HISTORIC returns from Swiss food giant Nestl are testament to how
profitable consistent growth can generate superior shareholder returns. A CHF1,000
investment in mid-1991 will have been worth CHF9,099 by April 2011 as Nestls 2010
CHF1.85 dividend sloshed in to portfolios. Two-thirds of this nine-fold increase, equivalent
to an 11.7% compound annual growth rate,
was the capital appreciation in the CHF179
billion caps share price. Crucially, the other
third came from the dividend payments
and their reinvestment in to further stock.
Rather than pursuing a quick growth fix
by acquisition, as did Kraft (KFT:NYSE)
when it purchased Cadbury in 2010,
Nestls board is firmly focussed on a less
glamorous organic progression. Steady
topline growth, consistent margin expansion and a focus on cash generation are the keys
to the companys success. The lowly-geared business reinvests its cash in to its brands to
maintain their pricing power. This in turn augments its credentials as a price setter, not price
taker, and the cash-generative model. It generates sufficient readies to pay a progressive
dividend policy after investment. Nestl has increased its annual dividend in all but one of
the last 20 years between 1991 and 2010, a trajectory only interrupted in 1995 when the
payout was held at 1994s CHF 0.27.
Many companies including Nestl run dividend reinvestment plans. Alternatively,
brokers operate low-cost dealing facilities to the same end. Ideally, investors should go for
scrip schemes, when offered by firms, whereby shares are issued instead of dividends to
avoid all fees. The Share Centre charges 0.5% to reinvest dividends.
CAPM SAYS:
Cost of equity = RFR + ( x ERP)
CAHILL'S READY RECKONER
Poor pricing power
Operationally geared, high fixed costs
Vulnerable to raw material price rises
Dependent on one product
Dependent on large customer/supplier
High exchange-rate risk
Sensitive to weather patterns
Poor corporate governance
Management acting in own, rather than
shareholders' interests
Weak management structure
Source: Making the Right Investment Decisions: How to
Analyse Companies and Value Shares by Michael Cahill
TOTAL RETURN FROM NESTLE FOLLOWING 20-YEAR
DIVIDEND REINVESTMENT STRATEGY
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
2000
4000
6000
8000
10000
*Assumes dividends reinvested on dividend
payment date. Assumes net 15% dividend tax,
after 20 percentage-point rebate on 35%
withholding tax to UK residents
COMPANY PICKS
British Land (BLND) 464.9p BUY
Large dividends are part of the allure of
British Land (BLND), arguably the safest of
the large cap Real Estate Investment Trusts
(Reits). Buffered by long rental leases, the
Reit is an attractive investment, despite
its exposure to the stagnant retail sector.
Although earnings growth prospects
would appear modest, with a 14% drop in
earnings per share (EPS) the consensus
expectation for the year to March 2013,
a 15% discount to adjusted NAV suggests
the bad news is priced in and the shares
look good value. After a difficult 2011
for the property sector patient investors
may want to start building exposure in
anticipation of better times ahead from
2013 and beyond. (VSP)
LVMH (MC:PA) 112.2 BUY
Key brand Louis Vuitton is set to be at
the vanguard of LVMH's (MC:PA) drive in
to China. The fashion and leather goods
specialist's plan is to expand Louis Vuitton
by opening more outlets, rather than via
concessions in third-party stores. This
strategy will afford better control of the
brand and further augment the global
fashion leader's pricing power. There is a
risk the 56 billion cap's chief executive
officer and chairman Bernard Arnault
gets distracted from the path of organic
expansion by a large, potentially value-
destroying, acquisition, as he is definitely
sniffing around Hermes International
(RMS:PA). Despite the purchase of a 20%
stake in the rival leather and fashion group,
Arnault is unlikely to hurry he stalked
Italy's Bulgari for ten years ahead of 2011's
decisive swoop.(SK)
Nestl (NESN:VX) CHF 54.25 BUY
The highly defensive Swiss global branded-
foods leader, whose products range
from Nescaf instant coffee granules to
the KitKat chocolate bar, has the ability
to push up prices without damaging
volumes. Belgian chief executive officer
Paul Bulcke's 32-year tenure at the
a glance, the diering risk/reward proles
by individual equity. Risk/reward proles
by broad sector are suggested by Cahill (see
'Sectors risk/reward prole' below). But,
as Cahill warns, volatility as a measure of
risk has limitations.
Prior to its collapse Enron had a beta
of 0.7, but investors lost everything as a
result of spectacular corporate governance
failings which led the energy trader to take
reckless risks with shareholders' capital. To
avoid missing the bigger picture, the former
analyst ventures a checklist of 10 warnings
signals (see 'Cahill's ready reckoner', page
25), which take in qualitative considerations
such as corporate governance.
BIGGER PICTURE
Volatility-based risk analysis fails to
explain how Nestl, with a beta of 0.5, has
consistently generated an annual return
approaching 12% over the past 20 years,
more than 50% greater than the return
which might be suggested by the CAPM.
But Nestl score's highly on qualitative
measures of business risk. It is lowly
geared, rarely if ever engages in large-
scale merger and acquisition activity, has
a trustworthy chief executive o cer who
has been at the company for 32 years and
enjoys exceptional pricing power by dint of
careful investment in product innovation,
promotion and advertising.
There is exchange-rate risk associated
with Nestl, given its exposure to the Swiss
franc. Traders worried about short-term
currency movements can hedge their
positions accordingly. But an investor,
like Mr Long Term and his 30-year time
horizon, are in a better position to carry this
risk and go for the best globally-diversied
companies, where ever they are quoted.
To that end ve our six equity picks are, in
our view, among the global leaders in their
eld. The sixth, British Land, is very much
UK focussed but its equity and property-
like characteristics should produce real
returns against an inationary backdrop.
Property is a real asset and in the
same way dividends have historically
tracked ination, so too have rents. Our
direct position on property is taken via
Threadneedle UK Property Fund. To
hedge against tearaway ination we have
chosen a commodity collective with a high
weighting to gold, City Natural Resources
High Yield Trust.
We suggest limited exposure to xed
interest, via two high-yield corporate bond
funds, Threadneedle High Yield Bond
and Henderson Strategic Bond. Mr Long-
Term can aord to largely take the slings
and arrows of equity investing. Next week,
in part three of this series, we will explain
how a medium-term investor should have a
much greater weighting to xed interest.
440
460
480
500
520
540
560
580
600
620
640
1500
1600
1700
1800
1900
2000
2100
2200
BRITISH LAND
FTSE ALL-SHARE R/E IVST TRUST
45
46
47
48
49
50
51
52
53
54
55
4800
4900
5000
5100
5200
5300
5400
5500
5600
5700
5800
NESTLE 'R'
FTSE ALL-SHARE FD PRODUCERS
Source:
Thomson Datastream
SECTORS RISKREWARD PROFILE
Risk Expected annual
15 reward (%)
Utilities 1 6
Airline 5 20?
Food manufacturing 2 8
Advertising agency 34 15
Wine and spirits 2 8
Biotech 5+? 25
Source: Making the Right Investment Decisions: How to
Analyse Companies and Value Shares by Michael Cahill
*This is a nominal target, i.e. does not take into account ination
**Calculated using FIND.co.uks annuities calculator at www.
FIND.co.uk/pensions/annuities_centre/annuities-calculator
***Calculated using Selftrades pension calculator at www.
selftrade.co.uk/research-education/tools/calculators.php
Source: Shares, Selftrade, www.FIND.co.uk
MR LONG TERM will require a 1.2 million pension pot
to achieve his desired 65,000 gross annual income at
retirement. This figure is about two-thirds of 100,000
annual income the 35-year-old anticipates to be earning at
the time he finally opts for a life of leisure.
To get to that targeted 1.2 million mark over a 30-year
time frame, Mr Long Term will need target a 10% annual
return, given his chosen monthly Self-Invested Personal
Pension (Sipp) contributions limit.
He therefore decides to weight his portfolio 60% towards
equities in order to achieve this. With six months worth of salary
on deposit Mr Long Term is confident he can keep tucking away the
390 monthly contributions required to meet his target even in the
event he needs to change job. He does not expect household costs
to dramatically ramp up since he and his family live in an area with a
good state school. Meanwhile, any unexpected medical bills should
be well covered by his generous company insurance scheme.
Mr Long Term
Gross annual income () 50,000
Desired annual gross income on retirement () * 65,000
Annuity rate (%)** 5.28
Net monthly income () 3,333
Monthly household budget () 2,500
Monthly savings () 833
Current value of pension () 25,000
Target value of Sipp () 1,231,061
Available monthly pension savings () 430
Years to retirement 30
Required annual return target (%) 10
Monthly Sipp contribution () 390
Thirty-year projected value of Sipp () *** 1,240,744
Projected gross income at retirement ()*** 65,511
Ten-year projected value of Sipp after tax-free lump sum ()*** 1,231,641
Projected gross income at retirement ()*** 65,031
CHF179 billion cap, three in the top job, is
emblematic of what Nestl (NESN:VX) is
about steady dependable, well-managed
organic growth. This is best reflected in a
11.2% compound annual growth rate in the
dividend in the 20 years between 1991 and
2010 from CHF0.22 to CHF1.85. (SK)
Royal Dutch Shell (RDSB) 24.72 BUY
The 153 billion cap, which operates on a
level with the world's biggest oil majors,
is an exciting growth opportunity. It is due
to execute 20 new developments over
the course of the next two years. Chief
executive officer Peter Voser has pledged
to grow the business profitably. His target
to increase cashflow by as much as 80%
between 2009 and 2012 based on a
conservative assumption of oil staying in
a range of between $60 to $80 a barrel,
should further augment the juicy and
reliable - 4.3% prospective dividend yield.
(SK)
Unilever (ULVR) 21.60 BUY
The food plus home and personal care
play is one of a handful of London-quoted
global consumer staple plays. A strong
exposure to emerging markets, from
where the 28 billion cap generates 55%
of sales, enhances its growth trajectory,
and, in turn, total return potential. Historic
underinvestment in product innovation
and marketing resulted in the FTSE 100
business losing market share, but this
1750
1800
1850
1900
1950
2000
2050
2100
2150
2200
4800
4900
5000
5100
5200
5300
5400
5500
5600
5700
5800
UNILEVER (UK)
FTSE ALL-SHARE FD PRODUCERS
Rebased to rst
MODEL PORTFOLIO (%)
EQUITY 60
British Land (BLND)
LVMH (LVMH:PA)
Nestl (NESN:VX)
Royal Dutch Shell (RDSB)
Unilever (ULVR)
WPP (WPP)
BONDS 20
Henderson Strategic Bond
Threadneedle High Yield Bond Fund
COMMODITIES 10
City Natural Resources High Yield Trust (CYN)
PROPERTY 10
Treadneedle UK Property
has been addressed by chief executive
officer Paul Polman. Investment levels are
now comparable to those at peer Nestl
(NESN:VX). (SK)
WPP (WPP) 677p BUY
Even if buy-and-build strategies have
been the downfall of many a chief
executive officer, WPP's (WPP) Martin
Sorrell has made it work beautifully for
his media agency. The 8.6 billion cap
acts as an umbrella for a diverse range of
individual companies. Sorrell has shown
it is possible to acquire businesses which
depend on personal relationships. Using
heavy incentives to retain the founders
and leaders of acquired businesses, such
as Taylor Nelson Sofres in 2008, has
helped WPP preserve previously existing
relationships and drive those businesses
forward. Further deals will spearhead a
continued drive in to emerging markets
for what is already a globally-diversified
business. (SK)
BONDS
Henderson Strategic Bond Fund 113.5p
BUY
THIS 'ALL-WEATHER' fund is for safety-
first investors. Paying income quarterly,
the Henderson Strategic Bond fund offers
exposure to high-yield, investment grade
and government bonds. The Open-ended
investment company (Oeic) has generated
42.2% and 24% on a total return basis over
three and five years. It has outperformed
the average fund in the Investment
Management Association's Strategic
Bond sector over both these periods. Top
ten holdings include UK gilts as well as
corporate paper ranging from media giant
ITV (ITV) to Rexam (REX). (JC)
Threadneedle High Yield Bond Fund 40p
BUY
This portfolio puts clients' cash to work
mainly in higher-risk UK and international
fixed-interest securities. At the last count
(30 Nov) UK fixed-interest accounted
for almost 91% of the assets of the book,
which offers investors a near-8% yield.
The Open-ended investment company
(Oeic) has returned a sector-busting
28.5% over five years on a total return
basis, and 69.7% over three. Its five-year
performance compares to a 21.8% return
from the average fund in the Investment
Management Association's Sterling High
Yield sector. (JC)
COMMODITIES
City Natural Resources High Yield Trust
(CYN) 242.5p BUY
This 165 million investment trust offers
exposure to soft commodities, including
agricultural products palm oil and rubber,
and 'hards'. Gold is the dominant hard,
constituting roughly a third of the City
Natural Resources High Yield (CYN) trust's
portfolio. It is the top-performing vehicle
of the seven funds in the Association
of Investment Companies' (AIC) Sector
Specialist: Commodities and Natural
Resources segment. In the five years to 3
January 2012 the AIC says it has generated
an 88.4% total return versus 51.3% from
the average sector fund. (SK)
PROPERTY
Threadneedle UK Property
Fund 94.3p BUY
The 393 million 'bricks and mortar'
property vehicle invests in actual property
rather than property company shares.
Exposure to regional retail and office
London is a tiny percentage of the fund
- perhaps explains the Threadneedle UK
Property fund's underperformance against
the Investment Management Association's
Property sector over three years, with the
book having generated a modest 4.9%
total return. It should nevertheless reward
patient investors over a 20-year view given
its reassuring diversification across the UK
retail space. (JC)
2007 2008 2009 2010 2011
100
110
120
130
140
150
160
170
180
HENDERSON STRATEGIC BOND I INC
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

2009 2010 2011
70
80
90
100
110
120
130
140
THREADNEEDLE HIGH YIELD BOND
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

2009 2010 2011
83
84
85
86
87
88
89
90
91
92
THREADNEEDLE UK PROPERTY INCOME
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

StockMarketWire
FREE comprehensive independent
f inancial news for Investors, Traders
and Business Professionals on
a minute-by-minute basis covering:
Market news
Economic news
The latest annual and
interim results
Bids, mergers and takeovers
Economic and
Company Calendars
Broker views and
recommendations
Contract wins and joint ventures
Major share price movements
Top Risers/Fallers
Directors deals
Daily trading statements
Company news from PLUS
Daily mining and resource
stock focus
Regular market wraps
pre open, 9.30am, Midday
and at the Close of Play
Available on the
NOW also
available on
your iPhone.
Visit: www.stockmarketwire.com
unearthing market gems
M
innow African Mining & Exploration (AME:AIM)
could soon reignite market interest as it delivers a
long-awaited update on its search for gold in West
Africa. The rm hopes to start drilling in the next
few months in Mali following the acquisition of a drill rig last year. Its
shares are a speculative buy at 5.12p.
African Mining & Explorations 4.3
million market capitalisation is rmly
underpinned by its last reported cash
position of 3.9 million (as of 21 Sep 11),
while the drill rig was worth 250,000 at
acquisition in summer 2011. Chief executive
o cer Mark Jones says cash burn has since
been minimal.
The share price has suered from an
absence of news since half-year results (26
Sep 11). This silence, together with reduced investor appetite for
junior resource plays, has pulled the stock 75% below its all-time
high of 20.12p (14 Feb 11).
Jones says the company is nalising a trading update which will
detail plans for 2012. This could have a positive impact on the share
small cap should soon end its news blackout with development plans
african mining
to show its
golden touch
price as investors have been waiting for news of drilling activity in
Mali, previously earmarked to start in October 2011.
African Mining & Exploration was valued at 7.1 million when
it joined Aim on 1 November 2010. It carried out a 12,269 metre
drilling programme on four prospects in Mali which concluded
in May 2011. While it achieved good results on two of these sites,
most of the drilling was concentrated on
the third prospect which proved to be a
disappointment alongside the fourth target.
It struggled to get a rig for follow-up
drilling as contractors were in high
demand amid the West African resources
boom. Jones says the company decided to
buy its own rig in order to speed up work
and have more exibility with exploring
prospects. In the six-to-eight week period
it takes to get drill samples analysed
by laboratories, the miner will lend its rig to other companies.
Remuneration will be sought through equity stakes in projects
rather than day-rate hire fees.
Shares says: This is a high-risk trade so only invest money you can
aord to lose. SPECULATIVE BUY at 5.12p.
4
6
8
10
12
14
16
18
20
22
AFRICAN MINING & EXP.
FTSE AIM SS BASIC RESOURCE
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Dan Coatsworth
Tom Sieber
interest in mozambique assets prompts frm to put itself up for sale
INVESTORS SHOULD BOOK some prots
in Cove Energy (COV:AIM) following the
announcement (5 Jan) the group has put
itself up for sale. Some observers estimate
a deal for the company could be worth up
to $1 billion.
Since we last agged the East African oil
explorer (see Small Caps, Shares 1 Dec 11) its
shares have surged by 60% from 79p to 125p.
With no oer yet on the table it would be
prudent to take prots while retaining
an interest in the stock equivalent to your
initial holding. This residual position will
help investors play the possibility a deal is
agreed at a higher level than the market is
currently expecting.
There has to be a good chance of a
hefty bid as a number of companies are
registering their interest in the company on
the basis of its 10% interest in the Rovuma
block oshore Mozambique, the site of a
number of large discoveries.
Shares says: BOOK PROFITS

SELL in
Cove Energy but retain the equivalent of
your initial stake for a free play on any
bidding war.
Time to shelter some prots in Cove
Corn to ofer
rich harvest
We are bullish on corn for 2012 as a mixture of healthy
demand and supply pressures imply a rising commodity price.
Take a long position through exchange-traded commodity
product ETFS Corn (CORN) at $1.97. The value of corn was
driven up in 2011 by weak production in the americas. The new
corn season started in september last year and supplies have
so far been disappointing because of unfavourable weather
conditions. in contrast, demand remains strong for
corn as animal feed, particularly from asia. The risk
to consider is a likely reduction in subsidies for the
ethanol market where corn is used to make fuel. We
do not see that as an immediate worry, but an issue
nonetheless to keep in mind when going long of corn.
a report scheduled for release today (12 Jan) from the
us Department of agriculture will give a clearer picture
on global
supplies.
The market
is eager for
guidance
on how dry
weather in
south america
is afecting
crops. (DC)
Autos to drive
palladium higher
The auTo seCTor is still in top gear, despite
lasting fears of worldwide economic slowdown,
and this trend should prompt investors to buy ETFS
Physical Palladium (PHPD) at $63.81. The metal is
a key component in the production of autocatalysts for
combustion engines. The latest batch of car sales data from
the us (4 Jan) the second largest auto market behind China
showed light vehicle sales up 8.7% in December from the same
month the previous year to 1.24 million units. For the whole of
2011 volumes were up 10.3% at 12.8 million. and German sales
released for last month (3 Jan) showed a 6.1% year-on-year rise
to 244,501 vehicles, while full-year fgures in europes largest
market advanced 8.8% to 3.17 million cars. at $650 an ounce,
palladium prices are trading at a 24% discount to last Februarys
ten-year high
above $860,
providing
healthy upside
potential. (rW)
22
24
26
28
30
32
34
36
38
40
ETFS CMOD.SECS.SHT.LEAD
LME-Lead 3 Months U$/MT
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m

Rebased to rst
50
55
60
65
70
75
80
85
ETFS METAL SECS.PHYSICAL PALLADIUM
Palladium U$/Troy Ounce
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
a CombinaTion oF unseasonal warmth
and scarce rainfall in south america makes
ETFS Soybeans (SOYB) an attractive
proposition at $19 as it aggravates an
already-tight fundamental outlook.
research house oil World has cut its
production estimates for brazil, argentina,
Paraguay, uruguay and bolivia, with supply
expected to fall almost 3% year-on-year
in the 2011-2012 season, to 132.7 million
metric tons. south america is
responsible for more than half of total
world soybean production. The impact
of the weather on latin supply pushed
soybean prices to two-month highs just
below $12 per bushel last week, and with
prices bouncing of Decembers 14-month
lows around $10.80, a run towards
septembers three-year high above $15
looks likely. (rW)
Soybeans to shoot higher
16
17
18
19
20
21
22
23
24
ETFS CMOD.SECS.SOYBEANS
Soyabeans, No.1 Yellow C/Bushel
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Pd
46
unearthing market gems
A
court decision next week
(17 Jan) on bringing nuclear
waste to an existing
hazardous waste facility in
northamptonshire could trigger earnings
upgrades for Augean (AUG:AIM). Buy
the 29 million market cap in anticipation
a public appeal is rejected.
Market consensus fgures do not factor
in any contribution from the potential new
waste stream to future earnings. augean
reckons it would only take a few months
to start processing nuclear waste upon a
court victory.
House broker singer reckons each
1,000 tonnes of material could boost
pre-tax profts by 500,000. this is
based on fees for handling similar waste
in mainland Europe. singer is currently
forecasting 1.4 million pre-tax proft for
2012, so the new waste stream could have
departments at its East northants
hazardous waste site. a public objection
was fled in July saying augean should
have considered the environmental impact
of operating a larger site than currently
planned. the High court challenge was
dismissed in november 2011, yet an appeal
was subsequently lodged.
chief executive o cer paul Blackler
claims there is only one site capable of
taking low-level waste in the uK, located
at sellafeld. this is constrained on
capacity and space is really needed for
more di cult-to-handle material. He
says a court victory this month would
make augean the frst alternative site for
low-level waste. nuclear sites have waste
ready to move and we would be
the natural choice for Magnox, Harwell
and winfrith.
Shares says: BUy Augean at 29p.
a meaningful impact on these numbers.
augean will not given any guidance on
expected tonnages until the court case is
concluded, so it is impossible to put an
exact fgure on the amount by which proft
forecasts could be upgraded.
the Environment agency granted
permission in May 2011 for augean to take
low-level waste such as rubble from
decommissioned nuclear power plants
and equipment from hospital radiology
Dan Coatsworth
earnings could significantly improve if service group gets green light for new waste stream
The personal insolvency specialist is set to reassure with trading update
Fairpoint a good play for hard times
Buy consuMEr dEBt consultancy Fairpoint (FRP:AIM) ahead
of next weeks year-end trading update which is likely to reveal the
frst signs of an uptick in trading.
the Manchester-based frm, set to produce its update on Monday
(16 Jan), is yet to recover from last springs proft alert. falling
unemployment at the time prompted the warning, but since then the
uK joblessness has begun to trend up again.
with base rates at 0.5%, personal insolvencies are unlikely to spike
as they did in the early 1990s. But any indication of an improvement
in trading could be su cient to prompt a powerful rerating of a
business whose valuation remains depressed.
the 21 million cap is trading on just fve times consensus
forecast earnings per share of 10.9p this year. further catalysts could
include comment about the uKs hidden personal indebtedness
accompanying next months latest insolvency service fgures (3 feb).
the insolvency service only measures bankruptcies and the
bankruptcy-light individual voluntary arrangements (ivas) option.
But ivas are for consumers with sizeable debts. there has been a big
spike in debt management plans, which are only used for those with
assets of 15,000 or less, and the insolvency service has failed to
spot this.
Shares says: Fairpoint could be a powerful rerating play. BUy
at 48p.
22
24
26
28
30
32
34
AUGEAN
FTSE AIM SS INDS GDS & SVS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Augean
upgrades
rest on
court ruling
Simon Keane
Profit from future stars
ediTed bY
STeVeN
FRAZeR
James Crux
Sell Wigan-baSed retailer JJB Sports (JJB: AIM) despite
better-than-expected Christmas trade. Performance was delivered
only against very poor comparatives, while competitive pressures
continue to intensify.
last weeks (5 Jan) Christmas trading update demonstrated a
welcome 5% like-for-like sales increase over the four weeks to 26
december, as well as 6% improvement in gross margin. but the 22.6
million caps peak trading period performance was achieved against
a soft base due to the snow of late 2010. Furthermore, cumulative
like-for-like sales for the 47 weeks to boxing day actually decreased
by 13.5% and gross margin sank by a worrying 20.8% amid heavy discounting to shift stock.
Januarys sales and forthcoming sporting events such as the UeFa european football
championships and london Olympics could give sales a shot in the arm. Yet JJb has to
contend with the efect of the worsening credit squeeze on consumers as well as stif
competition from Sports Direct International (SPD).
Seymour Pierces Freddie george carries a price target of just 5p, forecasts January 2012
losses of 60 million and does not envisage break-even until FY14 at best. Management
at JJb, whose shareholders, curiously, include bill gates, still faces an uphill task to turn the
business around even after a major round of cost cutting and store closures.
Shares says: JJB still faces intense pressures and the future is uncertain.

SeLL at 9.25p.
Too early to bet on turnaround at
the embattled retailer
JJB Sports still in
poor shape
disposal programme leaves educational software specialist positioned for recovery
Sales put RM back on course
Steven Frazer
Educational softwarE suppliEr RM (RM.) is close to
completing non-core disposals and a strategic rethink. investors
should therefore take a speculative position at 64p ahead of full-
year results, due later this month.
last week (4 Jan) the 55 million cap
sold of assets related to its dacta business,
including an interest in an educational joint
venture with lEGo, maker of the
cult childrens building toy. Having
previously liquidated other peripheral
units in the usa and australia, rM is left
with just its cashless catering systems
business Easytrace still to sell. once that
has gone, the company will return to its
traditional territory of educational
software and accessories.
this renewed focus on its core markets looks likely to inspire
hopes rM can return to growth even in the prevailing tough
climate of reduced educational spending. the full-year fgures
slated for late January could provide some welcome initial signs
of this.
rM has been in limbo after last years proft warning (29 sep 11),
the result of shrinking education spending
both in the uK and north america. the
alert led in turn to the appointment of serial
turnaround specialist Martyn ratclife as
executive chairman, a move that will inspire
recovery confdence following his stellar
work at it service frm Microgen (MCGN)
and Sagentia (SAG:AIM), the outsourced
r&d venture.
Broker numis expects rMs 2011 pre-tax
proft for the year to 30 november to fall
37% to 11.7 million last year, before a 38%
rebound to 16.1 million in 2012, implying a forward price/earnings
ratio (pE) of just 4.8.
Shares says: SPeCULATIVe BUy at 64p.
40
60
80
100
120
140
160
180
200
RM
FTSE ALL SHARE S/W & COMP SVS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
0
10
20
30
40
50
60
70
JJB SPORTS
FTSE AIM SS RETAIL
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Overseas earnings and new products underpin
prospects at porcelain tableware play
portmeirion well
worth pocketing
James Crux
usE a drift down from a 522.5p 52-week peak as an opportunity
to pick up shares in porcelain tableware and cookware counter
Portmeirion (PMP:AIM). a prospective price/earnings ratio (pE)
of 10.3 looks ungenerous given the stoke-on-trent based groups
overseas growth potential.
portmeirions premium spode and royal worcester brands are
helping the globally-facing business generate proftable growth.
sales to the us,
italy and the far
East should more
than ofset sluggish
progress in the uK.
with the
seasonally stronger
second half likely to
have been boosted by
brisk trading in the
run-up to christmas,
notably in north america, the 42.5 million cap is on course to take
2011 profts 14% higher to 6 million. that should translate in to a
10% leap in earnings per share to 40.6p, while even an unchanged
annual dividend payout of 17.4p would leave portmeirion ofering an
attractive and reassuringly well covered yield of 4.2%.
Shares says: BUy Portmeirion at 417.5p for its export-driven
earnings growth and safe-looking dividend.
lansdowne on the
right road
Tom Sieber
bUY ShaReS in
Lansdowne Oil & Gas
(LOGP:AIM) ahead of
results, due at the end
of the month, from an
appraisal well on the
barryroe discovery in
the Celtic Sea of the
coast of ireland.
if, as hoped, the well
confrms a 50-million-barrel-of-oil fnd the result could well be a re-
rating of shares in the company, which has a 20% stake in the asset.
Just before Christmas (23 dec) lansdownes main partner
Providence Resources (PVR:AIM) agreed to swap San Leon
Energys (SLE:AIM) 30% position in barryroe for a 4.5% net Proft
interest (nPi) agreement on future returns from the feld, taking its
total working interest to 80%.
broker liberum Capital estimates this nPi is worth 35 million.
On this basis a readthrough from the deal would value lansdownes
20% stake at 23.7 million more than half its market cap of 44
million at the time of writing.
Shares says: BUy Lansdowne Oil and Gas at 35.5p.
Simon Keane
invEstors sHould Buy scottish tv
play STV (STVG) ahead of next months
results. the full-year numbers are likely to
demonstrate it too has been a benefciary of
a reported seven-year high in festive peak-
time viewing fgures at ITV (ITV).
the 32 million cap generates 90% of
sales from its ownership of the scottish
broadcasting rights for the itv network.
it has been reported its 2.7 billion cap
peer took 29.7% of peak-time viewing on
christmas day, up from 22.1% in 2010 and
the best share since 2004. while stv does
not air all of the itv network programmes,
as scheduled by itv, it did broadcast
Downton Abbey and Coronation Street, the
back-to-back combination said to have
driven the ratings spike.
stv had 58 million of net debt at the 30
June half-year end and high gearing may
explain why its shares have not followed
those of itv higher. since trading resumed
after the christmas break itv has risen
almost 10%. Meanwhile UTV (UTV), which
holds the northern irish broadcasting
rights, is up more than 5%.
stv usually reports in late february
ahead of itv and utv in early March.
news of strong trading should help the
broadcaster as it renegotiates a roll-over of
lending facilities that are due to expire next
year.
Shares says: STV was always likely to be well
within its banking covenants even before any
Christmas ratings spike. BUy at 78.5p.
a winning iTV network Christmas schedule will help Scottish broadcaster
STV to enjoy seasonal cheer
Pick up shares in company ahead of imminent
results from appraisal drilling in Celtic Sea
400
420
440
460
480
500
520
540
560
PORTMEIRION GROUP
FTSE AIM SS PERS & H/H GDS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Small cap income stars
Dan Coatsworth
inVeSTORS dO nOT need to restrict themselves to mid
and large cap companies in order to fnd income. There are
numerous small cap stocks that pay decent dividends. We
have run a flter to fnd those that pay well, have robust
earnings to cover the shareholder rewards and whose
shares are beating the broader market. Our top picks are
touch screen specialist Zytronic (ZYT:AIM) and document
management provider IDOX (IDOX:AIM); both of which are
running Shares Plays of the Week trades (see page 10).
We used four diferent criteria to identify what we believe
are the nine best small-cap income plays for 2012.
A market cap of less than 200 million.
A prospective dividend yield above 3%.
Dividend cover of at least two times.
Must have outperformed the FTSE All-Share in the past
three months.
Company epic Market
cap (m)
Prospective
divi yield (%)
divi cover 3-month rel.
strength (%)
begbies Traynor beg:aiM 28.7 7.5 3.2 39.9
Communisis CMS 39.5 5.6 3.4 1.3
Promethean World PRW 116 4.3 8.9 11
Renew RnWh:aiM 43.7 4.1 3.6 15.8
Victoria VCP 21.5 3.9 2 3
Zytronic ZYT:aiM 37.4 3.5 2.7 19.9
hogg Robinson hRg 178 3.4 5.6 7.4
World Careers network WOR:aiM 8 3.3 4 2.7
idOX idOX:aiM 87.2 3 2.4 3.4
Data taken 5 Jan 2011. Source: CompanyREFS

Vishala Sri-Pathma
Take a POSiTiOn in Ark Therapeutics (AKT) ahead of more positive
newsfow in 2012.
an encouraging manufacturing update (4 Jan) on arks colorectal
cancer drug, Coload1, ofers plenty of encouragement. Following
successful initial production, the 7 million cap and its partner, PsiOxus,
are now starting pre-clinical toxicology studies before the Phase i study
this year. The success of this venture could prove to be a trigger for
further partnerships, with ark freely disclosing multiple discussions are
in progress and further deal announcements could be in the pipeline.
The biotech play had a strong year in 2011, bolstering its balance sheet
and cashfow through the sale of Crawford healthcare 2.7 million and
the receipt of 1.7 million in government grants. ark also received two US patents which added
7 million to its books.
growth in the contract manufacturing business and any upfront or milestone payments
associated with the partnering of pipeline programmes would further extend arks cash
resources, and are necessary to generate recurring income. The current pipeline of products
provides much confdence this can be achieved. arks key products address acute areas
of unmet medical needs in vascular disease and cancer where there are large market
opportunities and a higher likelihood of further contract wins in the short term.
additional long-term deals for its Finnish gMP manufacturing facility and a partner for its
vascular drug, nRP-.1, would be further positive steps.
Shares says: BUy Ark Therapeutics at 3.38p.
green light for first drug looks set to spur on
more deals for biotechnology play
Drug launch spells
good news for Ark
3.00
3.50
4.00
4.50
5.00
5.50
6.00
ARK THERAPEUTICS GP.
FTSE ALL SHARE PHARM & BIO
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m

Rebased to rst
The markets demystified
This is quite understandable, since AT&T
(T:NYSE), now purely a telecoms services
provider, developed the transistor in 1947
while Texas Instruments (TXN:NYSE)
gave the world the printed circuit board in
1958. The latter milestone came just 13 years
before Intel (INTC:NYSE) started to make
microprocessors on its way to becoming the
biggest chipmaker in the world, as measured
by 2011's annual sales of some $54 billion.
Such geographic considerations aside,
there are six main types of chip-related
company in which to invest.
Chip-design software. These
companies do not actually have silicon
chip products of their own. Instead they
sell electronic design automation (EDA)
software tools, which help semiconductor
companies confgure new chip products
more quickly. A couple of UK-listed players
have fallen by the wayside here and the
global leaders are US frms such as Cadence
(CDNS:NDQ) and Synopsis (SNPS:NDQ).
Raw materials. Pure Wafer
(PUR:AIM) and IQE both prepare the
discs, or wafers, from which chips are
manufactured.
Fabless & chipless. Cambridge-based
ARM is the daddy here. It does not make
chips does not even have a chip design.
Instead ARM licenses out an idea, or
architecture, which chip companies can
then use as the basis for their own designs
and products. It is therefore known as a
semiconductor intellectual property ('Semi
IP') company. The frm also bags a royalty
fee for each chip sold which is based on
its architecture and this is why it is both
fantastically proftable and wildly cash
generative. In the frst nine
months of 2011,
ARM
racked up a
stated operating
margin of 43.9%
and on a stated basis
threw out 153 million in net
cash from operating activities
for a cash conversion rate of 151%.
Russ Mould
B
etter known as a silicon chip, or
microchip, an integrated circuit
(IC) is a vital part of the global
economy today. Annual sales of
these tiny products exceeded $300 billion for
the frst time ever in 2011 and without them
desktop, laptop and tablet personal computers
(PCs), mobile and smartphones would be
mere pipedreams. Meanwhile, cars, industrial
automation equipment, digital cameras and
televisions are all better, smarter and above all
cheaper due to the global chip industry.
The UK has a vibrant role in the global
semiconductor industry. ARM (ARM) is the
world's biggest semiconductor intellectual
property (IP) player, while CSR (CSR) is
strong in Bluetooth wireless connectivity
chips. Imagination Technologies (IMG)
has built a niche in graphic design and
Wales' IQE (IQE:AIM) is a leader in wafer
preparation. Shares bows down to no-one
in its admiration for ARM but we slightly
prefer Imagination as a momentum play and
believe a restructuring could start to unlock
value at downtrodden CSR.
In the frst of a special two-part series,
The Oracle will seek to explain the diferent
types of chip plays. We will elaborate on how
ICs are made and what drives the so-called
'silicon cycle' so investors do not feel they
need a degree in physics or chemistry to
proft from this enormous global industry.
Chips with everything
Although Korea, Japan, Taiwan, the UK
and increasingly China are all home to key
players in the IC business, Silicon Valley
is seen as the true home of the microchip.
How to understand .....
silicon chips (Part I)
Complex manufacturing process a key part of $300 billion industry
Fabless. Wolfson (WLF) and CSR
design and sell their own products, but they
do not make them. The manufacturing
process is outsourced, and each company
receives its income in the form of royalties,
which are generated when a product
featuring one of their chip designs is
manufactured and sold. Imagination
Technologies runs a similar operating
model, but also licenses out its intellectual
property. This model is very proftable if
end volumes are strong, but can run into
problems when chip manufacturing capacity
is tight, as the subcontractors can charge
more for the manufacturing process, eating
into the fabless frms' profts.
Integrated. These frms design, sell and
also manufacture their own chips. They are
therefore highly operationally geared and
will make extremely high margins when
factories are fully utilised, but can quickly
plunge into loss if demand starts to waver
and the production lines are not kept very
busy. There are no real examples of this left
among the UK-listed, following the takeover
of Zetex by Diodes Inc in 2008. World
leaders in this sphere include American
microprocessor giant Intel, Franco-Italian
combine STMicroelectronics (STM:PA)
and Korean tech behemoth Samsung
Electronics (005930:KS), whose prowess in
the feld of memory chips is unquestionable.
Chip-making equipment. Chipmakers
need to pack their factories with so-called
The markets demystified
Source: Renasas
semiconductor manufacturing equipment
(SPE). This kit is used in the multi-stage
process of manufacturing their products.
When the semiconductor cycle is strong,
chipmakers will build more factories,
and order more equipment, to help them
meet demand, but in a downturn, capital
expenditure budgets are pared back to
the minimum and orders postponed or
cancelled this cycle of boom and bust
will be explained in greater detail in the
second part of this
series next week. The
UK is a bit bereft of
listed pure SPE plays
following Sumitomo
Precision's
(6355:T) bid for
Surface Technology
Systems in 2007
and Bede's plunge
in to administration
in 2008, although
precision instrument
experts Spectris
(SXS) and Renishaw
(RSW) ofer exposure.
Global leaders in
this area include
the Netherlands'
ASML(ASML:AS),
America's Applied
Materials
(AMAT:NDQ)
and Japan's Tokyo
Electron (8035:T).
Chip making
marvels
The process of
making silicon chips, or products based on
more unusual compounds such as gallium
arsenide (GaAs) or silicon germanium
(SiGe), is a complex one and this helps
explain why ASML, Applied Materials and
Tokyo Electron focus on an SPE industry
that was estimated by Gartner Group to
itself be worth $61 billion in 2011.
To put it crudely, the IC production
process has four distinct phases and frms
tend to specialise in a particular area.
Wafer preparation. Pure silicon is
grown in ingots up to 300mm in diameter
and then sliced into wafers that are less than
one millimetre thick and then polished.
Wafer processing. This stage involves
more than a dozen individual chemical
processes ranging from photolithography,
to ion implantation, etching, chemical and
physical vapour disposition (CVD and PVD)
and molecular epitaxy. At each stage a
material or chemical is added to the wafer
to form transistors directly on the silicon
and each process is repeated many times.
Chemical-mechanical planarisation (CMP)
and backgrinding then follow, where the
wafer is smoothed of and made thinner so
the fnished chips can be placed on circuit
boards, before the wafer is mounted and
chopped up in to individual dies.
Wafer preparation is known as the 'front
end' manufacturing process. Leaders here
include photolithography specialist ASML,
etch and deposition expert Tokyo Electron
and Applied Materials, which added ion
implant skills with 2011's purchase of Varian.
Lam Research (LRCX:NDQ), another
front end giant, is poised to supplement its
etching prowess with the acquisition of CVD
specialist Novellus (NVLS:NDQ).
Packaging and bonding. The dies are
then packaged, encapsulated, trimmed and
formed so the individual devices can be
interconnected to form the fnished IC.
Testing. Throughout the whole process
the fnished wafer, individual semiconductor
devices and completed ICs are subjected to
rigorous electrical tests to ensure they are of
su cient quality.
Packaging is known as the 'back end'.
Applied Materials is again a major player,
while Kulicke & Soa (KLIC:NYSE) and
the Netherlands' BESI (BESI:AS) are
leaders in bonding and packaging.
Laws of physics
The SPE industry is vital as it facilitates
the production of cheaper and cheaper
chips. Moore's Law, named after Gordon
Moore, one of the co-founders of Intel, was
long interpreted to mean the complexity
and performance of
semiconductors would
double every two years,
while prices would
remain at minimum
cost. The result is prices
will halve every 18
months or so. A state-
of-the-art chip fab costs
$3.5 billion at the very
least and is likely to
have a fve-year life at
the most. That means
depreciation alone is
nearly $2 million a day,
before any other costs
such as raw materials,
staf, energy and
research spending are
taken in to account. To
meet this challenge,
chipmakers need to get
higher throughput and
SPE helps them do so in
two ways:
Smaller
geometries. This
means printing ever-
smaller patterns of circuits on the silicon
wafer. A shift here happens every two years
or so. Leading-edge chips are now printed at
0.12 (or 12 one-thousandths of a millimetre)
and development work on sub-0.10
technology is afoot.
Larger wafers. Wafers that are 300mm
in diameter are standard for leading-edge
production facilities, while 200mm was
the industry norm in the 1990s and 150mm
before that.
The increases in production ofered
by these two techniques in isolation or
combined can be huge and make managing
capacity additions di cult. This is just
one reason why the silicon cycle and
therefore chip stocks show such a volatile
performance history and this will be
explained in greater detail in the second part
of this study next week.
Lead frame Wire
Mold resin
Inspected
wafer
Dicing
Chip
appearance
inspection
Mounting Bonding
Mold
packaging Marking Shipping
Mounted
appearance
inspection
Bondled
appearance
inspection
Sorting,
BT
Final
inspection
Managing and ensuring semiconductor quality at every step
Formation of elements and
other functional components in the wafers
Photo lithography, etching,
ion implantation, and heating
Metallization,
passivation
Acceptance
inspection
for wafers
Inpecting
fundamental
element
characteristics
Evaluating
on-wafer
functions
and
performance
Wafer supply
Wafer
warehousing
Semiconductor manufacturing process: Back End
Semiconductor manufacturing process: Front End
Source: Renasas
Lead frame Wire
Mold resin
Inspected
wafer
Dicing
Chip
appearance
inspection
Mounting Bonding
Mold
packaging Marking Shipping
Mounted
appearance
inspection
Bondled
appearance
inspection
Sorting,
BT
Final
inspection
Formation of elements and
other functional components in the wafers
Photo lithography, etching,
ion implantation, and heating
Metallization,
passivation
Acceptance
inspection
for wafers
Inpecting
fundamental
element
characteristics
Evaluating
on-wafer
functions
and
performance
Wafer supply
Wafer
warehousing
Semiconductor manufacturing process: Back End
Semiconductor manufacturing process: Front End
12-month profit on all Chartist trades: -1.4% vs. FTSE All-Share -1.5%*
Trendspotting
Trendspotting
EvEn though thE uK equity market,
as benchmarked by the FtSE 100, can
point to a gain of more than 10% since
the end of november the fundamental
technical picture remains unchanged.
Elliott Wave analysis still fags the risk of
substantial downside and I am sticking to
my sell call made at 5,702 late last year
(see Chartist, Shares 3 nov 11) with a
price target of 4,800, implying potential
downside of 15%.
Despite the recent rise, the Elliott
Wave approach still provides a gloomy
perspective. In the context of the ffth and
fnal segment of a fve-wave downmove,
I believe the late-year rally forms the
second part of the ABC three-wave
sequence I believe commenced when last
Februarys 6,091 high was reached. For the
fnal fall to be averted labelled C on the
chart the index would need to surge
beyond the peak identifed as B, which is
last octobers 5,714 summit.
Should the uK equity market fail to ride
new Year optimism to such giddy heights
then I would expect gravity to quickly take
hold and wipe out the gains of the last six
weeks and more. the key then for bears
would be to focus upon any retest of 4,800,
site of the trough from which the FtSE 100
rallied in both 2010 and 2011. Any such
decline would complete an almost textbook
head-and-shoulders pattern and should
the neckline give way then the indicator
could well head for 3,500 and the nadir seen
during the darkest days of the 2008 to 2009
bear market.
In the unlikely even the market were to
head beyond 5,714 and then 5,830 I would be
obliged to reverse my position and go long.
A CrItICAl Support level for sterling
against the dollar looks set to give way
and I therefore retain my bearish view
on the pound, which should be sold at
$1.5421. My last stab at this cross, selling
the pound at $1.6060 (see Chartist, Shares,
3 nov 11) is already some 6.7 cents, or 4.0%
in proft and with my initial goal of $1.5390
in view I am now stretching my price target
to $1.4295.
Bears will immediately argue the upside
to sterling is capped not far north of $1.6570
and the 38.2% retracement of its late 2007
to early 2009 drop from $2.1080 to $1.3790.
last Augusts failed attempt to overcome
resistance here resulted in a drop to $1.5421
ahead of a rally and then a further decline
back to this key threshold.
A slightly positively inclined line
evidences itself from September 2010
and looks to me like a topping pattern
neckline so gBp/uSD stands at a critical
juncture. Some forex punters now will
fancy going long of sterling on the basis
the support level has held for the last
ffteen months and could do again. they
will set a protective stop just below the
line to close out or even reverse the
position should support fnally crack.
But the rates inability to recover above
its 50-day average in the last six weeks
means I would prefer to stay short sterling/
long dollar, in the belief confrmation of
the top will force the rate toward the May
2010 bottom of $1.4255.
In the longer run such a decline would
presage a retest of the twin lows close
to $1.3790 that marked the early 2009
low point for the pound. So unless the
British counter can mount an improbable
recovery that punches through both the
50-day average and the bear trend line by
rising above and beyond $1.5760, further
weakness relative to the dollar looks likely.
*FTSE All-Share comparative performance is from the start of each technical trade until present or when proft is taken/stopped out. Portfolio runs on a 12-month rolling basis. In the past 12 months the FTSE All-Share is
SELL 5,649 TARGET 4,800 STOP LOSS 5,835
FTSE 100
GBP/USD
SELL $1.5421 TARGET $1.4295 STOP LOSS $1.5760
5
3
1
2
4
A
B
C?
5
3
1
2
4
A
B
C?
16/7/07 3/2/12 '08 '09 '10 '11 Jul Jul Jul Jul
FTSE 100 (UKX)
Oct Apr Oct Apr Oct Apr Oct Apr Oct
7000
6800
6600
6400
6200
6000
5800
5600
5400
5200
5000
4800
4600
4400
4200
4000
3800
3600
3400
Scope Share Chart (c)
ACTUAL
50-DAY MOVING
AVERAGE (M1)
200-DAY MOVING
AVERAGE (M2)
8/5/07 3/2/12 '08 '09 '10 '11 Jul Jul Jul Jul
GBP/USD
Oct Apr Oct Apr Oct Apr Oct Apr Oct
2.10
2.05
2.00
1.95
1.90
1.85
1.80
1.75
1.70
1.65
1.60
1.55
1.50
1.45
1.40
ACTUAL
50-DAY MOVING
AVERAGE (M1)
200-DAY MOVING
AVERAGE (M2)
12-month profit on all Chartist trades: -1.4% vs. FTSE All-Share -1.5%*
down by 7.2%. By asset class the Chartists returns are as follows: indices -1.1%, stocks -1.3%, commodities -2.1% and currencies -3.5%. Buy calls have recorded an average 3.9% loss and sell/short calls a 2.5% proft.
Simon Griffin email: chartist@shares.msm.co.uk
Although MY prIor positive call on
Renishaw (RSW) at 959p (see Chartist,
Shares, 13 oct) ended up badly o beam,
the expected upmove has now started
to develop. My 15 price target fags up
potential gains of 43% in the metrology and
healthcare electronics specialist.
looked at in perspective the dip down to
800p in late november that followed the
prior months proft warning turned out to
be very much a spike low. this even gives
further strength to the bull case. A shake-out
like this helps determine whether any further
stock can be prised from the hands of weak
holders. the rapid bounce upward shows the
market is actually being stalked by buyers,
rather than littered with would-be sellers,
and this is just the recipe for a bull trend.
After the conclusion of a saucer-shaped
bottom pattern, the upside breakout has
seen the shares already appreciate by some
30% since that november nadir. renishaw
is now pressuring the 23.6% Fibonacci
retracement of the decline seen during
the second half of 2011, when the shares
dropped by over 57% from their late July
peak of 18.86.
the sharp upmove also leaves the
gloucestershire frms shares above
potential resistance from the peaks posted in
early 2006. It also suggests the frst serious
upside resistance will come from the 38.2%
retracement level at 12.15. this mark sits
just below 12.40, a source of both support
and resistance toward the end of 2010 and
again in autumn 2011.
If renishaw can advance beyond this zone
then I would expect further gains to focus on
the 61.8% retracement level at 14.71, just
ahead of my price target of 15, a mark that
oered signifcant support in the spring of
last year.
I AM CloSIng out my autumn sell on
ASOS (ASC:AIM) at 15.70 (see Chartist,
Shares, 29 Sep 11) to lock in a welcome
10.4% proft and am turning positive on the
stock. After a big fall, shares in the online
retailer now look set to recover and may
even retest their old highs in due course.
When I turned bearish late last year, I
suggested ASoS shares could drop to test
the base line of the bull channel within
which they had largely traded until the
late spring of 2010. In eect, I was trying
to make the most of negative momentum
established early August with a break
below a bull trend line that had previously
provided conclusive support since February
2010. My strategy played out nicely until
mid-December when the retailer hit a low of
11.42. But that was still some way short of
my 950p objective, site of the channel base
line. to my surprise, ASoS did not even
test 10.67 and the 61.8% retracement of
the rise from october 2008s corrective low
of 202p.
the move up through both the 50-day
moving average and the bear trend line
developed since the end of August tells me
the market feels it is pricing in all the bad
news and more. It therefore seems sensible
to look for a rebound at the very least.
My initial objective is 16.48 and previous
support and resistance from the 38.2%
retracement of the fall witnessed during
the last four months of last year. next
would come 19.62, where price congestion
coincides with the 61.8% mark, ahead of a
dash to the old highs of 24.68. In the short
term the shares may seek to consolidate
but the newly bullish stance will only be
threatened by a decline below 13.
Market value: 763.6 million
Prospective PE 2012: 12.9
1-month price change: 10.4%
12-month price change: -18.2%
Yield 2012: 3.5%
Market value: 1.1 billion
1-month price change: 1.7%
12-month price change: -12.0%
Dividend yield 2012: n/a
BUY 10.49 TARGET 15.00 STOP LOSS 960p
Renishaw (RSW)
ASOS (ASC:AIM)
BUY 14.08p TARGET 19.62 STOP LOSS 12.80
2/6/08 3/2/12 '09 '10 '11 Jul Jul Jul
ASOS PLC (ASC)
Oct Apr Oct Apr Oct Apr Oct
26
24
22
20
18
16
14
12
10
8
6
4
2
ACTUAL
50-DAY MOVING
AVERAGE (M1)
200-DAY MOVING
AVERAGE (M2)
8/1/09 3/2/12 '12 '10 '11 Jul Jul Jul
Renishaw PLC (RSW)
Apr Oct Apr Oct Apr Oct
20
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
ACTUAL
50-DAY MOVING
AVERAGE (M1)
200-DAY MOVING
AVERAGE (M2)
SECTOR REPORT BEVERAGES
E
xtreme turbulence throughout much of 2011 resulted in a fight
to quality by cautious equity punters. Appetite for defensives was
clearly demonstrated by tobaccos position as the best performing
sector of 2011, followed by Pharmaceuticals & Biotechnology and
Technology Hardware & Equipment. Though it has had an inauspicious start
to the New Year (see table), last years fourth-best performer was another
safe haven sector, namely Beverages. While last years impressive share price
performances may fail to repeat, Beverages should continue to represent a
resilient investment arena throughout 2012, with many of its constituents
well-placed to generate above-trend growth.
Shares preferred beverages picks are global beer brewing behemoth
SABMiller (SAB) and premium alcoholic drinks powerhouse Diageo (DGE).
This sector-dominating duo have the ability to capitalise on continued
industry consolidation and are best placed to proft from emerging markets
growth. At the lower end of the market cap bracket, we presently prefer
Vimto maker Nichols (NICL:AIM) over robustly performing peer A.G. Barr
(BAG) on valuation grounds. We retain our bearish stance on larger soft
drinks peer Britvic (BVIC) on account of its debt burden and concern over
the security of the shareholder payout.
Earnings-growth enclave
As an industry, beverages has continued to showcase its quasi-defensive
traits in the midst of worsening economic conditions. This at the same time
as the sector contends with severe pressures on consumers disposable
income, particularly in sovereign-debt-stricken Europe, as well as
Ready to refresh the
parts other sectors
cannot reach
James Crux
FTSE ALL-SHARE SECTOR PERFORMANCE
1 Industrial Metals & Mining 9.0
2 Mining 5.1
3 Automobiles & Parts 4.3
4 Leisure Goods 3.4
5 Fixed Line Telecommunications 3.3
6 Forestry & Paper 3.1
7 General Industrials 3.0
8 Chemicals 2.8
9 Banks 2.7
10 Electronic & Electrical Equipment 2.6
11 Oil Equipment, Services & Distribution 2.6
12 Personal Goods 2.5
13 Industrial Engineering 2.4
14 Software & Computer Services 1.7
15 Life Insurance 1.7
16 Gas, Water & Multiutilities 1.7
17 Electricity 1.7
18 Household Goods & Home Construction 1.7
FTSE ALL SHARE 1.7
19 Oil & Gas Producers 1.6
20 Support Services 1.3
21 Nonlife Insurance 1.3
22 Financial Services 1.3
23 Construction & Materials 1.2
24 Beverages 1.1
25 Travel & Leisure 0.9
26 Real Estate Investment & Services 0.9
27 Pharmaceuticals & Biotechnology 0.8
28 Media 0.8
29 Mobile Telecommunications 0.7
30 Equity Investment Instruments 0.7
31 Industrial Transportation 0.5
32 Aerospace & Defence 0.5
33 Technology Hardware & Equipment 0.4
34 Tobacco 0.3
35 Food & Drug Retailers 0.2
36 Health Care Equipment & Services 0.1
37 Food Producers -0.2
38 Real Estate Investment Trusts -0.3
39 General Retailers -0.4
40 Alternative Energy -5.1
Data since 01 Jan 2012
Source: Thomson Datastream 5 Jan 2012
BEVERAGES SECTOR REPORT
SummARy
Despite elevated raw material
costs and weaker consumer
markets, the beverages sector
continues to demonstrate
creditable resilience. Those
businesses consistently investing
behind strong brands, conferring
enviable pricing power, should
continue to win out, while
emerging markets ofer larger
sector constituents a way to ofset
relatively sluggish trading in low
growth developed economies.
Bull CASE
Defensive attributes
Brand strength and pricing power
Emerging markets growth
BEAR CASE
Raw material infation
Weak consumer income
Strong performer in 2011
BEVERAGES
ThE STORy in numBERS...
Risk to earnings forecasts
(5=upside risk, 1=downside risk)
Earnings predictability
(5=very high, 1=very low)
Valuation
(5=very cheap, 1 very expensive)
Cashfow
(5=very strong, 1=very weak)
Against the herd?
(5=all brokers negative, 1=all positive)
COnSEnSuS
Total broker Buy ratings on stocks 23
Total broker hold ratings on stocks 10
Total broker Sell ratings on stocks 2
SECTOR PERfORmAnCE - 12 mOnThS
unprecedented raw material cost infation across the drinks sector.
Besides elevated energy costs, over recent trading periods, sector
constituents have had to contend with the margin-crimping efects
of sugar, fruits, oil-derived polyethylene terephthalate (PET), barley
and even glass costs.
Despite a moderation in growth rates, the soft drinks sector
nevertheless continues to perform solidly, not least because its
products are typically afordable. Purveyors of such low-ticket items
that continue to build on brand strength sport reassuring pricing
power, which in turn helps them maintain margins. Meanwhile
over in the alcohol and spirits industry, sellers of premium alcoholic
products are benefting from growth in emerging markets, where
increasing levels of afuence should support demand for luxury
beverage brands that provide the feelgood factor in straitened times.
Besides the proven resilience of its earnings streams and attractive
levels of cash generation, the beverages industry also lends itself
to bouts of consolidation. Investors can proft through merger and
acquisition (M&A) activity either by buying into the earnings streams
of deal-hungry consolidators or by selecting likely takeover targets,
those companies whose brands that could prove alluring to rivals
with strong balance sheets.
Soft options
Low-ticket soft drinks, rightly or wrongly linked to obesity, remain an
afordable treat even in times of economic hardship. And this simple
fact places the industry on a reasonably frm footing as we enter an
uncertain 2012. Hard-pressed consumers are however increasingly
seeking out value and this is driving high levels of promotional
activity in the industry, as brand owners and retailers look to pass on
price increases on one hand, while increasing advertising spend on
the other in order to maintain or win market share.
Against this testing backdrop, those quoted players investing
consistently behind their brands look best placed. Shares takes a
positive view on prospects at Cumbernauld-based A.G. Barr, the
Scottish outft that produces and markets the iconic IRN-BRU fzzy
drink as well as Rubicon and Strathmore water.
In last months (7 Dec) market missive covering trading in the
frst 18 weeks of the second half, the 485 million cap reported 5.6%
revenue growth against the equivalent period in 2010. This highly
credible performance refected the resilience of the soft drinks stars
core brands, in which chief executive ofcer (CEO) Roger White
continues to invest. As at 3 December, sales were 4.6% ahead year-
to-date, especially impressive given the 11.5% comparative growth
the fully listed frm delivered a year earlier.
Despite the dampening efect of poor weather last summer on soft
drinks sales, A.G. Barr still grew taxable profts from 16 million to
16.2 million during the half to July, buoyed by 6% collective growth
behind IRN-BRU, Barr, Rubicon and Caribbean ofering KA.
A progressive dividend payer with a strong balance sheet, A.G.
Barr should continue to fourish despite lower spending in the
soft drinks space, since its products are based on afordability and
quality, while its marketing pushes the heritage and value of its
brands. The snag is the shares remain quite highly rated, even after
a pullback from a 52-week peak of almost 14 to 12.50. Based on
Panmure Gordons 63.2p January 2012 EPS estimate, they swap
hands on a rather rich-looking price/earnings (PE) ratio of 19.8,
which suggests the stock is up with events for now.
Presently, we prefer Nichols, the highly focused Newton-le-
Willows-based soft drinks outft with a terrifc track record of growing
its top and bottom lines amid testing consumer markets. The 194
million cap continues to deliver premium growth rates thanks to
1 2 3 4 5
COnCluSiOnS
market share gains driven by consistent investment behind soft
drinks Vimto, Sunkist and Panda, as well as a line of Levi Roots-
inspired products sold through major multiples.
Latest (4 Aug 11) results from Nichols covering the frst half of
2011 revealed sales up 14.4% to 50.5 million and 20%-plus taxable
profts growth to 7.2 million. In the UK soft drinks business, Nichols
000'S
7.50
8
8.50
9
9.50
10
10.50
11
FTSE ALL SHARE BEVERAGES
FTSE ALL SHARE
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Buy
Buy SABMiller, Nichols
SEll Britvic
SECTOR REPORT BEVERAGES
S
H
A
R
E
S

P
I
C
K
S
volumes rose 11%
against a market up
only 1% in volume
terms, highlighting
further UK market
share gains.
International sales
continued to thrive,
up 13%, with sales
to the Middle East
growing by 11% and
those to Africa the
best part of 15%.
A very upbeat trading statement last week (6 Jan) further stokes
our enthusiasm for Nichols, which continues to nurture a net cash
pile. Management hiked the half-year dividend payout by 12.4% to
5p and further increments can be expected. This enviable liquidity
also leaves the company in a strong position to drive further
organic growth through investment behind its brands, as well as
via further acquisitive deals. Nichols, also active in both the Stills
and Carbonated drinks categories, has proven its ability to create
value through M&A before, having built a handy position in the soft
drinks on dispense market through the January 2010 and March 2011
purchases of Ben Shaws and Dayla.
Blue-chip behemoths
In the alcoholic drinks industry, we believe spirits, beer and wine
colossus Diageo remains exceptionally well-equipped to cope with
exacting economic conditions. A business boasting dramatic scale,
Diageo can depend upon the global appeal and rich heritage of
brands including premium scotch whisky Johnnie Walker, Smirnof
vodka and Baileys liqueur. The company is also renowned for
Guinness, its afordable stout brand imbibed in vast quantities
everywhere from Ireland and the United States to Nigeria.
Premium spirits tend to represent an afordable luxury even in
troubled economic conditions and the pricing power they confer
should continue to pave the way for margin expansion at the 35.4
billion cap, guided by chief executive ofcer (CEO) Paul Walsh
there has been market speculation he may be about to step down.
Diageo is employing its enviable cashfow to increase shareholder
payouts and pursue global consolidation, notably expanding its
presence in faster growing markets. Some 1.6 billion was invested in
the year to June alone. Besides the 1.3 billion acquisition of Turkeys
leading spirits company Mey Icki, Diageo took controlling stakes in
Serengeti Breweries in Tanzania and Zacapa super premium rum,
whilst also purchasing a holding in Vietnams Helico, behind the
Hanoi vodka brand. The FTSE 100 stalwart also made an additional
investment in premium Chinese white spirits company ShuiJingFang.
Diageo has already warned of how foreign exchange movements
would impact operating profts for the year to June 2012.
Nevertheless, its ability to generate growth in a sluggish global
economy is likely to remain highly prized. Better-than-expected 9%
organic sales growth was generated in the frst quarter to September.
Emerging markets provided the impetus, with Diageo enjoying
growth of 30% in Latin America, 14% in the Asia Pacifc region and
9% in Africa. In developing markets overall, sales rose some 20%,
driven by the performance of luxury brands such as Johnnie Walker.
Sentiment towards the shares, which have shown plenty of sparkle
since August, rising from 11.12 to 14.23, should remain positive
and they are well worth stashing away in the run-up to half-year
results (9 Feb),
as the frm looks set
to show year-on-
year sales growth.
Fellow FTSE
100 blue chip
SABMiller, the
global brewer
behind premium
international beers
including Pilsner
Urquell, Peroni
Nastro Azzurro, Miller Genuine Draft and Grolsch, also represents
a suitably safe investment.
The 36 billion cap, listed in London and Johannesburg and one
of the worlds largest bottlers of Coca-Cola products, ofers a
reassuring combination of pricing power, geographic diversity and
relatively low exposure to the uncertain beer markets of sovereign-
debt crisis hit Europe. Certain critics contend the company paid
a punchy price for iconic lager frm Fosters, yet what cannot be
disputed is the deal brings yet another much-loved brand into
SABMillers already enviable brewing portfolio.
Emerging economies in Latin America, Asia and Africa represent
veritable growth engines for the group, which should reap the
benefts of advancing beer volumes and value as the afuence
of the emerging markets consumer increases. Signifcantly, the
South African brewer is focusing much of its investment eforts on
Africa, where per capita consumption of beer is low but rising. In
addition, there are opportunities to substitute commercial brands
DESPITE COST INFLATION and more difcult trading in developed
markets, geographic diversity and pricing power should serve
SABMiller (SAB) well in the new age of austerity.
Developing markets should help SABMiller ofset trickier trading in
North America and Europe, where consumers are feeling the pinch
and markets are increasingly promotional. In addition, the 6.4 billion
paid for Fosters has brought SABMiller a much-loved lager brand and
a leading position in the stable Australian beer market.
For March 2012, Martin Deboo of Investec Securities sees SABMiller
brewing up a 10% rise in profts to $4.469 billion ahead of an 11%
advance in 2013 to $5.0 billion. With Fosters factored in, Deboo
forecasts $2.32 in earnings per share (EPS) for 2013, placing the
shares on a price/earnings ratio of 15.3. That rating looks reasonably
undemanding given SABMillers defensible margins and global growth
scope. Progressive
dividends the
shares ofer a
2.6% yield based
on this years
estimated 93.8 cent
payout only add
to the attractions
of the stock.
Brewing up good news
SABMiller (SAB) 22.87
1900
2000
2100
2200
2300
2400
2500
2600
SABMILLER
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Buy
5
J
a
n
1
2
J
a
n
1
9
J
a
n
2
6
J
a
n
0
2
F
e
b
0
9
F
e
b
1
6
F
e
b
2
3
F
e
b
0
2
M
a
r
0
9
M
a
r
1
6
M
a
r
2
3
M
a
r
3
0
M
a
r
0
6
A
p
r
1
3
A
p
r
2
0
A
p
r
2
7
A
p
r
0
4
M
a
y
1
1
M
a
y
1
8
M
a
y
2
5
M
a
y
0
1
J
u
n
0
8
J
u
n
1
5
J
u
n
2
2
J
u
n
2
9
J
u
n
0
6
J
u
l
1
3
J
u
l
2
0
J
u
l
2
7
J
u
l
0
3
A
u
g
1
0
A
u
g
1
7
A
u
g
2
4
A
u
g
3
1
A
u
g
0
7
S
e
p
1
4
S
e
p
2
1
S
e
p
2
8
S
e
p
0
5
O
c
t
1
2
O
c
t
1
9
O
c
t
2
6
O
c
t
0
2
N
o
v
0
9
N
o
v
1
6
N
o
v
2
3
N
o
v
3
0
N
o
v
0
7
D
e
c
1
4
D
e
c
2
1
D
e
c
2
8
D
e
c
SECTOR RANKING
1
5
10
15
20
25
30
35
40 S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m

Beverages 2011
27
31
30
24
32
26
33
30 30 30
32 31
29
27
25
29
27
29
19
15
23
18 18
20
23
2020
16 16
13
16
14
12
14
11 11
9 10 9 9
7
5
7 7 7 7
8
5
4
6
5
4
BEVERAGES SECTOR REPORT
CANNy INVESTORS SHOuLD continue to pile into soft drinks star
Nichols (NICL:AIM) in the run-up to Marchs 2011 preliminary fgures.
Profts should come in signifcantly ahead of 2010, while further
earnings upgrades look likely going forwards.
The 194.2 million cap boasts enviable pricing power thanks to
sustained investment behind brands including Vimto, Sunkist, Panda
and Levi Roots Caribbean and continues to outperform the uK soft
drinks market. Generating half of profts, the expanding international
business ofers the real earnings excitement, with Nichols seeing vibrant
sales in its largest export market, the Middle East, as well as Africa.
Besides its positive organic growth potential, Nichols has a growing
cash pile which can be put to work via earnings-enhancing acquisitions.
Forecast to deliver 14% earnings per share growth to 34.4p for 2011
ahead of a further 8% rise to 37.1p by 2012, Nichols trades on a 2011
prospective price/earnings ratio (PE) of 15.4, falling to 14.3, a signifcant
discount to peer A.G.
Barr (BAG). At the
time of writing,
there is 20%
potential upside
towards broker
Panmure Gordons
640p published
price target.
SELL SOFT DRINKS business Britvic (BVIC) ahead of what may well
prove a less than sparkling forthcoming (25 Jan) frst-quarter update.
Sentiment towards the 770.7 million cap is likely to remain poor in the
near term, given a lofty debt levels and exposure to markets including
the uK, Ireland and France.
Chelmsford-headquartered Britvic, behind the Tango and Robinsons
brands, may struggle to deliver topline growth this year in spite of weak
comparatives and the clinching of three new major agreements for the
Britvic-owned Fruit Shoot brand in the uS. Despite the defensive traits
of the uK beverages market, its challenged GB Stills business looks
vulnerable to revenue declines in a highly promotional environment.
The dividend, upped 6% to 17.7p last year, looks less than rock-solid,
covered less than twice by earnings which fell 8.2% to 33.7p a share.
While the outlook for input cost infation this year looks more benign,
the shares have already fallen from their 52-week high of 477.1p and
could yet come
under further selling
pressure.
Plenty of growth fzz
Nichols (NICL:AIM) 530.75p
Set to leave a sour taste
Britvic (BVIC) 324.7p
250
300
350
400
450
500
550
BRITVIC
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
350
400
450
500
550
600
NICHOLS
FTSE AIM SS FOOD & BEV
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
for unregulated home brews across the African continent, where
SABMiller is also looking to introduce products at the
premium end of its portfolio. Hence, capacity expansion
is underway in a range of African nations including
Uganda, Zambia, Ghana and Tanzania.
Overseas trades
More adventurous investors could
even look to buy one of the bevy of
internationally-listed beverages
stocks. Particularly interesting is
Rmy Cointreau (RCO:PA), which
sold its loss-making champagne unit
last year and now ofers a compelling
play on cognac growth in the emerging
markets of Asia. Speaking for more than
half of Rmys sales, cognac is estimated
by research frm Euromonitor to have
averaged 13% annual volume growth
between 2006 and 2011 in China alone.
Achieved against a backdrop of
global economic tumult, this growth refects
the combined efect of a rising middle
class and the ever-increasing numbers
of millionaires in Asia, where trends
towards premiumisation and conspicuous
consumption persist.
Even Rmys Liqueurs business, more
geared to the developed markets of North
America and Western Europe, is still forecast to generate 5% average
annual growth. Although the Paris-listed company is currently
family-controlled, sector bulls believe it could ofer long-term
M&A upside, given the attractions of brands including Rmy
Martin cognac, Mount Gay rum, St. Rmy brandy and
Cointreau liquor.
Another play on high end beverages is luxury
goods leader LVMH (MC:PA) (see
Feature, page 32). The France-based
concern is majority owner of
cognac and premium champagne
business Mot Hennessy, where
globally renowned brands
include Mot & Chandon,
Veuve Clicquot and Krug. The unit
is 34% owned and thought to be coveted
by London-listed partner Diageo.
Dutch brewer Heineken (HEIN:AS)
is a further dependable option (see
Feature, Shares 20 Oct 11). A cost-
efciency programme should help drive
a 12% operating margin higher, while
growth should come from established
premium brands and also emerging
market exposure in Latin America and
Africa. Strong free cash fow means
net debt is rattling down and dividends
should increase this year and next,
giving a yield of just under 3.0%.
Buy SEll
T
he euro may be trading near sixteen-
month lows against the dollar but the
pressure on the European counter is
unlikely to abate so long as economic
data from America continue to demonstrate far
superior momentum. In the absence of any likely
further action from either the European Central
Bank or the US Federal Reserve at their next policy
meetings due today (12 Jan) and later this month(23-24
Jan) respectively, sell the single currency against the
greenback at $1.2701.
Recessionary readings from key economic
confdence indicators, further budgetary chaos and
mildly disappointing bond auctions from Europe
all contrast markedly with decent employment and
improving business sentiment data over the pond.
While the European Union December purchasing
managers' index (PMI) reading remains mired below
the 50 mark that divides recession from growth,
at 46.9, the US equivalent, the Institute for Supply
Management's PMI, shows an eight-month high score
of 53.9.
In addition, both the ADP and non-farm payrolls
data from America pleased, coming in at 325,000 and
200,000 respectively, better than had been expected.
The drop in US unemployment to 8.5% could not
Eurozone's prospects look so much more bleak
American economy
leaves Europe's for dead
have contrasted more markedly with Spain's
increase to 23%, just as the Spanish government
looked to squeeze through a further 15 billion
austerity package. Potless Belgium was another
forced to fnd more cuts, this time 1 billion, even
though such programmes are likely to crimp growth
rather than help it.
Ebbing confdence in the euro is perhaps best
refected by Greece's 10-year interest rate, up at
37.99% as of last Friday (6 Jan) and lukewarm appetite
even for French debt. An attempt to raise 8 billion
saw demand for just 7.7 billion of paper and the 10-
year tranche saw skinny cover of just 1.6 times.
The key potential risk which faces those willing to
sell the euro is this is rapidly becoming a consensus
position. Data published by the U.S. Commodity
Futures Trading Commission just before the turn
of the year (27 Dec '11) showed speculative short
euro contracts outweighed longs by an all-time high
127,900 contracts, at 173,100 plays 45,200. It may
therefore not take much to panic any hot money out
of this position and a short-term euro rally cannot
be discounted. But the key trend surely remains
downward, as debt and economic stagnation worries
refuse to go away.
Shares says: Sell the euro at $1.2701.
Greece
Portugal
Ireland
Italy
Spain
Belgium
New Zealand
Australia
France
Austria
UK
Canada
USA
Germany
Sweden
Japan
Switzerland
TEN-YEAR GOVERNMENT BOND YIELDS
Greece
Portugal
Italy
Austria
Spain
Belgium
France
Ireland
Japan
USA
Germany
Sweden
Canada
Switzerland
Australia
UK
New Zealand
CHANGE IN TEN-YEAR GOVERNMENT
BOND YIELDS (BASIS POINTS)
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m
.
C
o
v
e
r
s
p
e
r
i
o
d
6
O
c
t
1
1
t
o
6
J
a
n
1
2
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m
,
6
J
a
n
2
0
1
1
13.29
8.25
7.16
5.72
4.65
3.90
3.83
3.58
3.39
2.05
1.96
1.95
1.86
1.68
0.98
0.65
0 5 10 15 20 25 30 35 40
37.99
-300 0 300 600 900 1200 1500
131
179
163
77
71
64
63
45
-1
-11
-13
-16
-32
-32
-40
-47
-66
Cashing in on currency
$
Edited by Russ Mould
MONDAY'S (9 JAN) AGGRESSIVE central bank
intervention gives risk-tolerant forex punters
another chance to take a shot at Turkey's currency.
Buy the dollar against the lira at TRY 1.8693.
After a horrid 2011, when the lira slumped by
a fth amid fears of economic overheating and
rampant ination, Central Bank of Turkey (CBT)
governor Erdem Bai backed up prior promises to
defend the lira with action. He sold $100 million
across two repo auctions.
Yet Shares remains steadfast in
its view it is impossible to buck
the market for long and the lira's
fundamentals remain questionable.
The immediate problems are
ination, which is running at 10.4% per
year, more than twice the o cial target of
5.5%, and a current account decit of 10% of gross
BANK OF ENGLAND governor Mervyn King may
choose to ag a third round of quantitative easing
(QE-III) for sometime this spring when he speaks
this week. But it is equally likely his European
counterpart, European Central Bank president
Mario Monti, will hint at further interest rate cuts.
With the British economy going better than its
European counterpart even if that is not saying
much buy the pound against the euro at 1.2141.
As Shares goes to press the Bank of England's
Monetary Policy Committee (MPC) is holding its
rst meeting of the year (11-12 Jan). The substance
Turkish lira unlikely to delight
Sterling to steam higher against euro
domestic product. Both will be worsened by a weak
lira, as this will increase the cost of imports and of
servicing its overseas debts, and hence the CBT's
intervention and policy of monetary tightening.
Yet the CBT is not helping itself eectively
shelving the benchmark repo rate of 5.75% and
forcing banks to use overnight lending priced at
12.5% instead.
Shares says: BUY the dollar at TRY 1.8693.
of this week's meeting is
expected to be more of the same
from December when the MPC
voted to leave rates unchanged
at 0.5% and QE at 275 billion.
MPC minutes due in two weeks
(25 Jan) may oer further clues as to
future policy. The market is starting to price in the
prospect a third round of QE and central bank gilt
buying worth 75 billion.
At least the UK's key purchasing managers index
(PMI) for services remains the right side of 50, at
54.0. That is consistent with economic growth
even if the manufacturing PMI came in at 49.6. The
respective eurozone PMI reading for services was
48.8 and 46.9 for manufacturing. These numbers
put the pressure on Monti to consider a third
25-basis point cut in the headline cost of borrowing.
The ECB may not act at this week's meeting (12 Jan)
but further policy response next month (9 Feb) is
quite possible.
Shares says: BUY sterling at 1.2141.
Further central bank action possible on both sides of the Channel
Central bank intervention doomed to failure
$
TRY
1.10
1.12
1.14
1.16
1.18
1.20
1.22
EURO TO UK (ECU HISTORY) - EXCHANGE RATE
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

1.45
1.50
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90
1.95
NEW TURKISH LIRA TO US $ (TK) - EXCHANGE RATE
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

I
nvestors are always told the benefts
of diversifcation when it comes to a
portfolio of investments. And when it
comes to the equity component, the
emphasis is on exposure not just to
the UK market but to overseas names too.
The question is how can overseas equities
best be accessed - via direct investing,
professionally-managed collectives or
exchange-traded funds (ETFs)?
As well as diversity, investing directly in
international shares can provide access to
economies with premium rates of growth
compared to the West, as well as companies
and industries which may not have
representation on the UK equity market. But
putting your money to work overseas can
have its drawbacks, too, and there are risks
and challenges of which any investor needs
to be aware.
Mark Allen at stockbroker Simple
Investments thinks there are several
disadvantages, notably that many brokers are
unable to ofer a full selection of markets.
Things are getting better but it is still
not easy to fnd a broker that will deal in
US or UK-based companies. As of the end
of November, 151 overseas names with an
aggregate market cap of 390 billion could be
traded on the LSEs Main Market, including
frms from the USA, Russia, South Africa,
South Korea, Japan, China, India and Israel.
The LSEs International Order Book
continues to go from strength to strength.
Ofering direct access to companies from
46 nations through one central order book,
it provides an easy and cost-efcient way
of diversifying portfolios and is proving so
successful statistics show Gazprom (OGZD)
as the most traded stock on the LSE in
November. Some 4.4 billion worth of deals
in the Russian gas giant were struck on the
International Order Book (IOB) that month,
with FTSE 100 frm Rio Tinto (RIO) next
on the list at 4.2 billion. Lukoil (LKOD),
Sberbank (SBER) and Rosneft (ROSN), also
Russian, each featured in the top 20 list of
most actively traded names with transactions
worth over 1 billion in each, while between
January and November last year the IOB
consistently represented between 14% and
18% of total LSE order book trades.
Latin American markets. You need to check
which broking frms ofer the coverage you
specifcally need.
India has only just welcomed foreign direct
investment in its capital markets and dealing
in Emerging European or Latin American
stocks is not easy. The good news is those
punters looking to access stocks listed on
less developed exchanges can use American
Depositary Receipts (ADRs) or Global
Depositary Receipts (GDRs).
Listed on the London Stock Exchange
(LSE), as well as international platforms such
as New York Stock Exchange and NASDAQ,
ADRs and GDRs can be traded, settled
and held as if they were ordinary shares in
David Burrows
Calling
international
rescue
Investing abroad brings clear benefts
but this simple guide highlights
how to avoid the key pitfalls
TRADING FEATURE INTERNATIONAL SHARE DEALING
8
9
10
11
12
13
14
15
16
17
18
OAO GAZPROM ADS (XSQ)
FTSE ALL SHARE
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
2012 pREvIEw TRADING FEATURE
India 93
Russia 84
Taiwan 66
South Korea 35
Egypt 23
Turkey 16
Netherlands 14
UK 13
Greece 12
Poland 11
Rest of World 142 S
o
u
r
c
e
:

L
o
n
d
o
n

S
t
o
c
k

E
x
c
h
a
n
g
e
,

a
s

o
f

N
o
v
e
m
b
e
r

2
0
1
1
Issuers by nation on the LSE International Order Book
Access all areas
Most brokers will
operate in the US,
Canada, Singapore,
Hong Kong and the
developed markets of
Western Europe. Yet
Japan, for example, is
a hard exchange for
which to even obtain
authorisation and
can be an expensive
place to operate. Most
broking frms steer
clear, although Barclays
Stockbrokers and
Saxo Bank do ofer
direct access.
For some investors
it may be that they
only require US or
Canadian coverage
from their broker so a
string of other market oferings is
really not an issue. James Daly at TD Direct
Investing says access to the less developed
markets is limited largely
because demand for the more obscure
markets remains muted.
Most brokers do not ofer direct access
to emerging markets as these can be more
difcult to trade in (legal requirements or
costs), or there is not sufcient demand from
their customers for the service. Typically
if someone wants to invest in a specifc
company in an emerging market, the two
main options are to contact a broker based
in the country, or a full-service broker in the
UK who may be able to help.
Even if most
emerging markets
are hard to access
directly, there
are still plenty of
overseas options
for investors intent
on looking outside
of London-listed
stocks. Certain
industry sectors
are harder to get
access to through
the UK exchange
alone for
example forestry
and fertiliser.
In recent years
brokers have
broadened their
market spread. TD
Direct Investing
ofers live online
trading on 17 international markets with 15
markets tradable online and by telephone,
with Sweden and Switzerland accessible via
phone only.
Back in Blighty
Some investors may have a more
international favour to their portfolios than
they realise, even if they are trading just
London-listed names, according to Phil
Wong, stockbroker at Redmayne-Bentley.
Achieving this overseas exposure is not just
a case of buying direct overseas equities.
Closer to home, and within the FTSE 100,
approximately 70% of the profts are derived
from abroad, he explains.
This is partly due to the growing number
of mining and oil companies that are now
listed on the LSE, including those from
Eastern Europe and Russia. Yet Allen at
Simple Investments stresses how trading
these shares in London may become less
easy going forward.
New rules could make access to some
overseas shares more difcult. Companies,
such as Evraz (EVR) (the steel group part-
owned by the oligarch Roman Abramovich),
recently sought entry to the FTSE indices by
attaining so-called premium listings on the
London Stock Exchange even though they
have free-foats of less than 25%.
Under new rules laid out by FTSE, from
January 2012, companies hoping to foat and
join its indices will have to ensure that at
least 25% of their shares are freely traded.
The index provider has introduced the rule
in response to pressure from the National
Association of Pension Funds which had
demanded that all companies hoping to join
benchmarks such as the FTSE 100 or FTSE
All-Share index ensured at least half their
shares could be freely traded.
The FTSE has so far agreed to increase the
limit from 15% to 25% but the 50% threshold
has not been ruled out for the future.
Under the new rules Eurasian Natural
Resources Corporation (ENRC), Essar
Energy (ESSR), Ferrexpo (FXPO) and
Fresnillo (FRES), which are already in the
indices with free foats of less than 25%, will
be given 24 months to increase the amount
of stock that can be readily traded.
This new rule could change the heavy
MOST ACTIVELY TRADED NAMES ON THE LSES INTERNATIONAL
ORDER BOOK
Issuer EPIC Turnover ( million)
1 Gazprom OGZD 4,391
2 Lukoil LKOD 2,055
3 Sberbank SBER 1,410
4 Rosneft ROSN 1,116
5 Norilsk Nickel MNOD 966
6 Novatek NVTK 693
7 Uralkali URKA 649
8 VTB Bank VTBR 498
9 Severstal SVST 312
10 Novolipetsk Iron and Steel NLMK 234
Source: London Stock Exchange. Data for November 2011
500
1000
1500
2000
2500
3000
3500
4000
4500
FTSE ALL SHARE
EURASIAN NATRES.CORP.
FERREXPO
FRESNILLO
ESSAR ENERGY
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
TRADING FEATURE INTERNATIONAL SHARE DEALING
the international stock markets and have
transparent pricing.
Allen supports the use of ETFs but stresses
investors need to be careful what they select.
ETFs are becoming more popular but some
are less liquid than others for instance
if you buy a big holding in iShares MSCI
Turkey (ITKY) you may struggle to sell
at a reasonable price. Also some ETFs are
leveraged so you could buy a holding and it
moves 10% but you move 20%-plus because
it is leveraged. And because of contango
issues not all ETFs refect the underlying
index either so you need to be aware of that.
You have got to pick carefully but options
like the iShares FTSE BRIC 50
(BRIC) are pretty
liquid
and
replicate
quite well.
Wong at
Redmayne-
Bentley adds
investors must
understand how
the ETF manager
replicates the
performance of the
underlying asset and
the costs involved
before investing.
Another consideration in the ETF market
is whether these are synthetic or physically
backed. Much attention has surrounded how
ETFs are constructed and the counterparty
risk and liquidity issues that are potentially
attached. Investors need to bear in mind
what are the actual underlying investments
that the ETF is exposing them too.
Collective responsibility
Andy Parsons, head of investment research
at The Share Centre, believes many investors
prefer to leave choosing which are the best
overseas picks to professional fund managers
who have analysts and people based on the
ground in the regions in which they invest
clients cash. He particularly points out
the benefts of Open Ended Investment
Companies (Oeics) and investment trusts on
ofer for income investors.
Over the past couple of years, investors
have expanded their investment horizons in
the search for equity income, appreciating
that globally there are a vast number of
companies ofering attractive dividend
yields outside of the UK. This should
provide diversifcation that an investment
portfolio based solely on UK companies
may not provide. For example Denmark is a
world leader in alternative energy solutions,
Germany has world class engineering
companies and car manufacturers and
US companies are currently the most
innovative and strongest brands in the
world, he explains. By gaining exposure
to this potential through a fund, instead of
the individual equity, investors are reducing
the overall risk. They are also gaining the
expertise of the fund manager, who will
undertake detailed research, visit individual
companies and stay up to date with market
trends and global issues.
weighting in oil and mining stocks in
the FTSE and it could certainly make a
diference to those looking to trade these
stocks and other foreign companies that
would ordinarily have looked for an LSE
listing, Allen comments.
Currency risk
One key issue of which anyone investing
overseas must consider is that of foreign
exchange movements. Your foreign holdings
will be priced and traded in the local currency
rather than sterling. Should the pound rise
in value against the respective regional
counter, then the value of your position
will diminish in sterling terms, although it
will increase should the pound fall. Traders
may choose not to cover their currency
risk but long-term investors may consider
hedging their positions, at least if they think
sterling is heading higher against a basket of
international currencies.
This can be done quite simply. If you
choose to buy stock in German car maker
BMW (BMWG:DE) , the shares are
denominated in euros. Any capital gains and
dividends will therefore be denominated in
euros and the UK-based shareholders will
efectively be long euro/sterling. In order
to hedge this position you just need to short
euro/sterling. Most brokers will be able to do
this for you either via a vanilla forex trade or
using leveraged instruments such as contracts
for diference (CFDs) or spreadbets in cases
where the initial capital commitment needs
to be kept modest. Remember to hedge the
full amount that you have invested.
Tax is a further issue, although again this
can be managed. Anyone looking to invest in
US stocks must fll in a W8-BEN form before
they start and then update the paperwork
every three years. This may sound like a
nuisance, but it is worth taking the trouble.
Without a completed declaration form,
you will not beneft from the UKs double-
taxation agreement with the US. This
could leave you subject to a 30% tax rate,
rather than the 15% which will be applied
by the Internal Revenue Service when the
American tax authorities deduct this levy on
dividends at source.
One advantage of buying stocks listed on
an overseas exchange is stamp duty is not
charged on most international exchanges.
This makes them particularly attractive to
active traders carrying out frequent deals.
Exchange-traded funds
ETFs provide simple exposure to
international exchanges. In theory they
are an efcient way for investors to play
1400
1500
1600
1700
1800
1900
2000
2100
2200
EUROPEAN ETF ISHARES FTSE BRIC 50
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
40
45
50
55
60
65
70
75
1.10
1.12
1.14
1.16
1.18
1.20
1.22
BMW
EURO TO UK (ECU HISTORY)
S
o
u
r
c
e
:
T
h
o
m
s
o
n
D
a
t
a
s
t
r
e
a
m

EXCHANGE RATE(R.H.SCALE)
1600
1800
2000
2200
2400
2600
2800
ISHARES MSCI TURKEY
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
The inside track
in time using the assumed trailing dividend
yield in year fve. The yield will depend
on three factors: the dividend cover, the
forward infation rate and the prospects for
real dividend growth.
I already envisage dividend cover
reverting back to a normal 2.0 by the period
end. I also assume dividends will once again
be growing at the normal 2.1% a year real
rate. These two numbers, in conjunction
with the BoE's forward infation rate in fve
years' time of 2.7%, are consistent with a
FTSE 100 trailing yield of around 3.2%.
Applying this 3.2% yield to a 398.9
dividend gives a value of 12,466 for my
FTSE 100 investment, or 14,720 with
dividends reinvested. It is possible to arrive
at an approximate dividend-reinvested
fgure by compounding over fve years the
value of the average dividend yield, which
Glenn Martin
E
xtreme equity market volatility
may have prompted many to
retreat to the sidelines and hold
their funds on deposit but placing
cash in the FTSE 100 is likely to prove a
more rewarding long-term option.
The best available maturity value for a
basic-rate taxpayer placing 10,000 in a
fve-year fxed deposit account is 12,027
(see table below). By comparison the
maturity value of a fve-year FTSE 100
investment is likely to be a lot higher, where
my base case is 14,381.
Two key factors
To a fve-year FTSE 100 investor there are
only two things which matter; the growth
in the dividend and the index's price at the
end of the period. Short-term prospects
are irrelevant. In accordance with equities'
infation-busting credentials dividends
have historically grown at 2.1% a year in
real terms. My base case assumes they only
advance in line with infation for the next
fve years.
The Bank of England (BoE) publishes
daily the market expectations for average
and forward infation rates over diferent
time periods. The expected average
infation rate for the next fve years is
2.3%. Based on the present 3.56% trailing
dividend yield on the FTSE 100 a 10,000
investment will generate a 356 dividend.
Applying a 2.3% annual growth rate to 356
gives a 398.9 dividend payment at the end
of year fve.
Companies are currently hoarding cash
as illustrated by the FTSE 100's hefty
2.77 times dividend cover. If cover reverts
back to its norm of 2.0, my assumption
of a 2.3% a year dividend advance for the
next fve years would imply an annual
earnings decline of 4.1% over the fve years.
This underlines the conservatism of my
base case.
Calculating the maturity value
Having arrived at 398.9 as the period-end
dividend it is possible to derive the FTSE
100 investment's capital value at that point
Why the FTSE 100 is
safer than cash
A five-year analysis of the blue chips' dividend prospects
suggests the real risk for investors is to leave their cash in the bank
I take as 3.38%. This is the mean of the
trailing yield at the beginning and end of
the period ((3.56%+3.2%)/2). Compounding
12,466 at 3.38% over fve years gives
14,720 (12,466 x 1.03385)
Finally, to get to the 14,381 maturity
value a 2.3%, or 339, deduction is made for
the costs of investing in the FTSE 100 via
an exchange-traded fund (ETF) dealing
commission, the bid/ofer spread and
the ETF's annual expenses. My workings
assume zero capital gains tax (CGT)
although do factor in the 10% dividend tax
as applied to a basic-rate taxpayer as the
above-cited trailing dividend yield is net of
this tax. The resulting 4,381 gain is 116%
higher than the 2,027 return from the fve-
year fxed deposit account.
Worst case
My worst-case assumption assumes 0.3%
dividend annual growth, which was the
worst compound annual fve-year dividend
growth rate in the last quarter-century (see
chart, left). This historic worst fgure covers
the half-decade ending 2010. But even
very pessimistic worst-case assumptions
still imply a FTSE 100 investment maturity
value of 11,131. The resulting return of
1,131, albeit 44% lower than the 2,027
return from the fve-year fxed deposit
rate, suggests the risk/reward equation is
very much in the favour of the fve-year
FTSE 100 investor. The average maturity
values of the base and worst-case scenarios
is 12,756, a 2,756 return, which is 36%
higher than that of the cash investment. If
the real annual growth rate of the FTSE 100
dividend over the period were to match its
long-term average of 2.1%, a return of more
than 6,000 could be delivered.
Glenn Martin frst developed his dividend-
based FTSE 100 valuation system in 1994
which forms the basis of his ShareMaestro
software and new book How to Value
Shares and Outperform the Market
FIVE-YEAR FTSE 100 INVESTMENT VERSUS
BEST FIVE-YEAR DEPOSIT RATE
Cash at
3.76%
Best
Case
Worst
Case
Initial Investment () 10,000 10,000 10,000
Current dividend yield (%) - 3.56 3.56
Current dividend () - 356 356
Annual dividend growth (%) - 2.30 0.30
End-period dividend () - 398.9 361.4
End-period infation (%) - 2.70 5.00
End-period div yield (%) - 3.20 3.80
End-period investment ex
reinvested dividends ()
- 12,466 9,510
End-period investment inc
reinvested dividends ()
- 14,720 11,393
Investment costs () - -339 -262
Maturity value () 12,027 14,381 11,131
*This assumes best gross rate of 4.7% for a fve-year deposit with
20% basic-rate tax deducted
Current fgures are as at 05/01/2012
Source: Bank of England, moneyfacts.co.uk,
ft.com, ShareMaestro Limited
0
3
6
9
12
15
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
FTSE100 COMPOUND ANNUAL DIVIDEND GROWTH
FOR PRECEDING FIVE YEARS
Start of year
G
r
o
w
t
h
(
%
)
Current gures are as at 03/01/2012
Source: ShareMaestro Limited
Boss Brian May has a platinum dealing record
Executive swoops ahead of
further potential property deals
The Trade
Buyer: Robert Ware, chief executive
Consideration: 480,000
Number of shares bought: 500,000
Subsequent holding: 5,500,000
The Trade
Buyer: Brian May, chief executive ofcer
Subsequent holding: 505,000 (0.84%)
Key trades at the top
or increase its dividend.
Buybacks came to 24.6 million in the
year to September 2011, representing 17.2%
of the share capital, and helped to drive a
2.5% increase in net asset value (NAV). The
1.1p per share dividend cost 1.2 million.
The shareholder payout could be raised with
comfort, not least as the yield on the shares
is just 1.1%.
A 38% discount to the 155.2p NAV should
help underpin the shares, as should the
frms solid fnancial record. The 99
million cap has generated 29.4 million in
profts after tax in the last three years, with
a return on equity averaging 7.1% per
annum, despite a deliberate policy of
holding cash for investment opportunities
which depresses returns.
Shares says: Buy Conygar at 96p.
Simon Keane
Follow thE lEad of Renew (RNWH:AIM)
chief executive ofcer Brian May and snap
up stock in the leeds-based frm. the 47
million cap looks set to continue to rerate
following its transformation from low-margin
constructor to infrastructure engineering
services play.
May has made money on each of the four
previous times he has acquired shares. we
fagged his last purchase, of 50,000 shares
at 60p as a buying opportunity (see Cover,
Shares, 31 Mar 11). his full dealing record can
be viewed at www.directorholdings.com.
last years fnals (22 Nov) confrmed
Renews successful integration of amco, the
deal which completed its crossover from
constructor to engineer. But the market is
yet to catch up, with the business trading on
just 8.3 times consensus forecast earnings
per share of 9.6p in 2012.
the full-year numbers revealed
Engineering Services accounted for 95% of
the periods adjusted operating proft. the
units focus on nuclear, environmental and
rail engineering give it good earnings visibility
not credited by the rating. we identifed
the frm as a top UK pick in our Britains Got
Talent series (see Cover, Shares, 14 Jul 11).
Shares says: a frm play supported by CeOs
admirable track record of shrewd purchasing.
Buy at 80p.
Renew is ready to rock
40
45
50
55
60
65
70
75
80
85
RENEW HOLDINGS
FTSE ALL SHARE INDS ENG
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
90
95
100
105
110
115
120
125
130
135
CONYGAR INV.COMPANY
FTSE ALL SHARE R/E IVST SVS
S
o
u
r
c
e
:

T
h
o
m
s
o
n

D
a
t
a
s
t
r
e
a
m

Rebased to rst
Conygar
looks a
canny trade
Vishala Sri-Pathma
F
ollow Conygar (CIC:AIM) chief
executive ofcer Robert Ware
and take a stake in the property
and investment group as it
gears up for more purchases in 2012. Ware
snapped up 500,000 shares at a total cost
of 480,000 as the investor in residential
and commercial sites goes on the prowl for
further opportunities.
In December, Conygar acquired nine
freehold and long leasehold properties
from a consortium for 39.9 million. This
high-yielding transaction has a respectable
spread of risk and ofers considerable upside
from both lease re-gears and development
opportunities.
Even after that deal, the frm still has
some 85 million available for further
investments, although the group could also
pursue its share buyback programme
disinfectant firms director hopes to clean up
Steven Frazer
EVEN THOUGH MIKE McGoun, chairman of
Tikit (TIK:AIM), has cashed in a slug of shares
worth almost 300,000 investors should resist
the temptation to follow the non-executives lead
and instead continue to buy the shares at 295p.
McGoun has been the chairman of legal and
accountancy IT outsources for close on 15 years,
during which time he has built up a signifcant
stake in the company. While Shares could not gain
details of the reasoning behind the sale of 101,000
last week (4 Jan), it is believed strong interest
in the stock from both institutional and private
investors may have prompted a move to widen the
shareholder base, while also allowing McGoun to
diversify his own assets. The chairman remains
interested in 635,633 shares, or roughly 4.3% of the
total, worth over 1.8 million.
Tikit can point to a remarkably resilient
business performance over the past couple of
years, despite the testing economic environment.
In a trading update issued alongside details of the
directors share sale, Tikit said trading for 2012
looked encouraging. The 43 million cap reported
a strong pipeline of new business and said it
would meet market expectations for the year to 31
December 2011 at the time of the full-year fgures,
due in March. That implies revenues of around
28.5 million and 20.8p per share of earnings
(EPS), 18% up on 2010.
Trading close to four-year highs of 295p, the
shares remain attractive on a 2012 price/earnings
multiple of 13, based on Singer Capital Markets
EPS estimates of 22.8p, especially as they ofer a
3.2% dividend yield.
Shares says: Neither the excellent track record
nor future growth potential appear not fully
appreciated. Buy Tikit at 295p.
Tikit still a stock
to ride higher
Vishala Sri-Pathma
taKE thE hINt from the boardroom at Tristel (TSTL:AIM), where non-executive
chairman Francisco Soler snapped up 201,730 worth of shares last week (3 Jan).
Solers swoop for 527,400 shares at 38.25p per share took his familys
combined interests in the company to 21.4%. he made his move ahead of
interim results due on 12 March.
the 15 million cap
develops chlorine dioxide
based disinfectants,
such as sprays, wipes
and gels. these are used
to sterilise surfaces and
surgical instruments. Its
legacy business, targeting
automated endoscope
re-processors is under pressure and shrinking. as a result the Cambridgeshire-
headquartered concern is focussing on domestic sales of its surface products,
international sales of hospital infection control products and entry into the
pharmaceutical and personal care (PPC) market.
a 34% increase in overseas sales to 1 million in the year to June 2011
suggests the plan is working, as do increased volumes for its new Crystel
disinfectants in the clean-room environment demanded by PPC manufacturers.
tristel plans to drive revenues here from 38,000 to 600,000 after the
investment of 1 million in developing suitable products and the recruitment of
a strong PPC sales team.
Shares says: Buy Tristel at 38.5p.
The Trade
Buyer: Francisco Soler, non-executive chairman
Subsequent holding: 8,548,877 (21.4%)
The Trade
Buyer: Mike McGoun, non-executive chairman
Subsequent holding: 635,633 (4.3%)
Tristel polishes its
growth strategy
d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S d I r e C T O r d e a L S
KEY
Cd commercial director
CeO chief executive of cer
Ced chief executive of division
CFO chief fnancial of cer
Ch chairman
COO chief operating of cer
CS company secretary
d director
dCh deputy chairman
eCh executive ch
ed executive director
Fd fnance director
MKd marketing director
NeCh non-executive chairman
Ned non-executive director
Od operations director
Sd sales director
SeC secretary
aLL daTa aLSO aVaILaBLe aT
www.ShaRESMaGaZINE.Co.UK/ShaRESdIRECtoRdEalS
Chairmans hefty share sale not a sign
of fading growth hopes
TOP BuyS
Company director Pos. date Price
(p)
No .of
shares
Value () holding
(No. of shares)
Current
price (p)
Conygar Robert Ware CEO 04/01/12 96.0 500,000 480,000 5,500,000 96.0
Capital & regional Louis Norval Ned 05/01/12 31.9 1,420,478 453,701 101,057,037 30.3
Capital & Regional Neno haasbroek NEd 05/01/12 31.9 1,420,478 453,701 100,849,787 30.3
Conygar Peter Batchelor FD 04/01/12 96.0 240,000 230,400 830,001 96.0
Tristel Francisco Soler CH 04/01/12 38.3 527,400 201,731 8,548,877 38.5
Conygar Preston Rabl ED 04/01/12 96.0 140,000 134,400 851,190 96.0
Conygar Steven
Vaughan
ED 04/01/12 96.0 120,000 115,200 495,000 96.0
Renew Brian May CEO 04/01/12 72.0 100,000 72,000 505,000 80.0
SaBMiller Georey Bible NEd 04/01/12 2315.7 1,950 45,156 71,550 2341.5
Quindell Portfolio Rob terry CEo 06/01/12 6.5 500,000 32,550 681,500,000 6.6
OPTIONS eXCerCISed
aggreko PlC angus Cockburn Fd 04/01/12 437.0 2,196 9,597 120,678 2131.0
TOP SeLLS
Tikit Mike McGoun CH 04/01/12 289.0 101,000 291,890 635,633 295.0
Imagination technologies Geo Shingles Ch 05/01/12 565.7 25,000 141,433 116,133 574.0
Imagination technologies david hurst-
Brown
Ned 05/01/12 572.8 20,000 114,550 50,000 574.0
Imagination technologies Ian Pearson Ned 05/01/12 560.1 2,000 11,202 33,122 574.0
Key trades at the top
Investor services guide
Halifax Share Dealing offers a range
of investment options to suit you:
Tradeonline,byphoneoronyourmobile
Tax-effcientinvestingwithourISAsandpensionaccounts
CFDsforthemoreexperiencedtrader
FreeMarketResearchCentrewithup-to-date
shareprices,analysistoolsandUKbrokerviews.
Aswithallsharedealing,youcanlosemoneyaswellasgain.Pleaserememberyoumaynotgetbackyouroriginalinvestmentandtaxlawsmaychange.
Call now on 08457 22 55 25
Or visit halifax.co.uk/begintrading
SO M
UCH
CHOICE
W
ITH HALIFAX
SHARE
DEALING
TRADE GOLD, OIL, INDICES AND MORE WITH
SPREADS AS LOW AS 0.3 INDEX POINTS.
Visit gftuk.com/shares to get started.
When trading CFDs, spot forex or spread bets you can lose more than your initial deposit.
GFT Global Markets UK Ltd. is authorised and regulated by the Financial Services Authority.
LETS TRADE
CFDs
o
n
l
i
n
e

t
r
a
d
i
n
g
to advertise in the Shares Services directory
please telephone Marcus Reilly on 020 7378 4582
Direct Market Access CFDs & Spread Betting to Global Markets
Find out more visit www.fpmarkets.co.uk or call 0800 612 7070
Equities, Indices, Commodities, FX - Lower Margins and Transparent Pricing
c
o
n
t
r
a
c
t
S

f
o
r
d
i
f
f
e
r
e
n
c
e
FSA No. 509746, Co. No. 06378544
Simple, straightforward share dealing for just 8.95

online
Remember that stocks and shares and any income derived from them can rise and fall in value. You may not get back the full amount of your investment.
Start trading now, call 01892 700838 or visit nandp.co.uk/share-dealing
l
Exclusive 8.95 online fat rate for Gold Classic Current Account customers
l
Standard Trading Account commission rates from 9.95
l
Free online market information service
l
Trade share certifcates by phone
l
No inactivity fees
The N&P Share Dealing Service is provided by Jarvis Investment Management Ltd. Norwich and Peterborough Building Society is authorised and regulated by the Financial Services Authority.
Principal Offce: Peterborough Business Park, Lynch Wood, Peterborough PE2 6WZ.
PrIme |arkets Is dedIcated to provIdIng a professIonal and personalIsed CF0 servIce to each of our clIents.
- Full CF0 advIsory servIce based on Industry leadIng research
- |arket leadIng executIon only servIce
- Stateoftheart onlIne tradIng platforms
PrIme |arkets LImIted Is authorIsed and regulated by the UK FInancIal ServIces AuthorIty ("FSA") FSK WAFNNC: CF0s Involve a hIgh level of rIsk and you can lose more than your orIgInal Investment. t Is not suItable for everyone so please ensure you understand the rIsks Involved.
The UKs Premier Specialist CFD Brokers
Call our Prime Markets brokers now on 020 7529 6390
for further information (quote SHARES Directory)
LETS TRADE
SPREAD
BETS
TRADE OUR WIDE RANGE OF MARKETS
AND PAY NO CAPITAL GAINS TAX.*
When trading CFDs, spot forex or spread bets you can lose more than your initial deposit. *UK Tax
laws may be subject to change, may depend on personal circumstances and can dier if you pay
tax in any jurisdiction outside of the UK. GFT Global Markets UK Ltd. is authorised and regulated by the Financial Services Authority.
WITH COMPETITIVE SPREADS
AS LOW AS 0.8.
When trading CFDs, spot forex or spread bets you can lose more than your initial deposit.
GFT Global Markets UK Ltd. is authorised and regulated by the Financial Services Authority.
LETS TRADE
FOREX
S
p
r
e
a
d
b
e
t
t
i
n
g
f
o
r
e
i
g
n
e
x
c
h
a
n
g
e
e
x
e
c
u
t
i
o
n
-

o
n
l
y

t
r
a
d
i
n
g
c
f
d

a
d
v
i
S
o
r
y
LETTERS Have your say?
Tracking the market lower
shares
shares
shares
shares
shares
SHARES
SHareS Staff may hold shares in some of
the securities written about in this magazine.
all shareholdings will be disclosed where it
may represent a potential confict of interest.
Information and tips included in Shares magazine
are general information only and are not intended
to be relied upon by individual readers in making
(or not making) specifc investment decisions.
appropriate independent advice should be
obtained before making any such decision. Shares
magazine, its staf and mSm magazines Ltd do not
accept any liability for any loss sufered by any
reader as a result of any such decision.
Subscription/Back issue
enquiries/Delivery enquiries
Quadrant Subscription Services
Rockwood House,
Perrymount Road
Haywards Heath,
West Sussex RH16 3DH
Telephone: 01444 475 661
email: shares.subs@qss-uk.com
UK Subscription rates (1st Class Mail):
159 one year; 280 two years; 380 three years;
37.25 quarterly by direct debit.
38.99 quarterly by credit card.
Overseas subscription rates (priority mail)
Per year: 239 europe/North america,
262 rest of World.
Two year rates: europe/North america
420; rOW 460. Overseas dollar rate (1 yr) $460.
Back issues: 4.50 (UK), 5.50 (overseas).
for Shares availability queries contact
020 3148 3300
1 In keeping with the existing practice, reporters
who intend to write about any securities,
derivatives or positions with spread betting
organisations that they have an interest in should
frst clear their writing with the editor. If the editor
agrees that the reporter can write about the
interest, it should be disclosed to readers at the
end of the story. Holdings by third parties including
families, trusts, self-select pension funds, self
select ISas and PePs and nominee accounts are
included in such interests.
2 reporters will inform the editor on any occasion
that they transact shares, derivatives or spread
betting positions. this will overcome situations
when the interests they are considering might
confict with reports by other writers in the
magazine. this notifcation should be confrmed
by e-mail.
3 reporters are required to hold a full personal
interest register. the whereabouts of this register
should be revealed to the editor.
4 a reporter should not have made a transaction
of shares, derivatives or spread betting positions
for one month before the publication of an article
that mentions such interest. reporters who have
an interest in a company they have written about
should not transact the shares within one month
after the on-sale date of the magazine.
e-mail: editorial@shares.msm.co.uk
Delivery enquiries: delivery@shares.msm.co.uk
Send your comments to: the editor, Shares magazine, thames House, 18 Park Street, London, Se1 9er,
or email us at: editorial@shares.msm.co.uk. We are unable to deal with queries over the phone nor can we advise on investments.
R
ather than opening a sell trade on the FTSE
(which can often be expensive) I am thinking
instead about using a sell spreadbet on an
exchange-traded fund (ETF), by way of a proxy
for a sell bet on the index. My intention is to hedge my long
spreadbet open positions.
My investment pot is quite modest and I am only thinking
about a 10-a-point sell bet which, with a 10% stop loss on
(say) a 600p ETF, would give a risk exposure of 60 points,
or 600.
As an alternative to a trade using an ETF, I have also
considered selling an investment trust (IT) that focuses solely
on buying UK shares. However, I think a sell on an ETF is a
safer option because (unlike ITs) ETF are usually passively
rather than actively managed.
Ideally I would like to identify a few cheap - sub-10
ETFs. To keep any margin call low if the trade goes against me,
I would prefer to use a wide stop loss of around 10% instead of
a tight one.
If I could fnd an ETF priced at (say) 400p a share, then my
10% stop loss risk would only be 40 points (400) rather than
60 points (600) as would apply to a 600p ETF, though that
likewise limits the upside of the bet. The trouble is, I cannot
recall seeing any ETFs with a traded price as low as 500p.
Is there a defnitive list of ETFs on the UK market I can look
at online? Can you highlight the names and EPICs of any
cheap ones you may know of?
It would also be good to know the names of spreadbet
companies that list low-cost ETFs on their websites as
standard instruments on which to trade, rather than having
to negotiate a phone deal to open such a trade.
Also, are there any better proxies for UK index
trades that I have overlooked, or even an alternative strategy
worth considering?
Martin Taylor, via email
Russ Mould replies: We are not permitted to give direct advice to
individuals so I cannot comment on your bearish view of the UK equity
market. I can at least ofer some help on ETFs and possible strategies. I
am not aware of a central depositary that lists all ETFs but a quick look
at the website of a good fnancial services provider should give you
what you need. Check out your own broker but if you go to Hargreaves
Lansdowns (HL.) site you can quickly sort through ETFs by provider
and asset class. I count 25 ETFs which allow you to trade UK equities,
long or short, leveraged or unleveraged. A leveraged short ETF would
be one option for you and you could investigate covered warrants,
which will permit you to hedge existing long positions by going short
while committing relatively little capital. Warrants also have the beneft
of limiting your downside to 100% of your outlay. But I would stress
both of these instruments are for experienced, risk-tolerant investors
and you should do plenty of research of your own before you consider
such tools. The websites of the key providers will provide ample
educational material for you to study before you place any trades.
INDEX
Companies Index
141
companies
in this issue
KEY main market aim Overseas markets exchange traded funds/products funds GDr
Access Intelligence (ACC) 4 Aim
Advanced Computer 4 Aim
Software (ASW)
Afren (AFR) 23
African Mining & Exploration (AME) 30 Aim
AG Barr (BAG) 40, 41, 43
Applied Materials (AMAT:NDQ) 37 NDQ
Ark Therapeutics (AKT) 35 Aim
ARM (ARM) 18, 19, 36
ASOS (ASC) 39 Aim
ASML (ASML:AS) 37 Amsterdam
AT&T (T:NYSE) 36 NYSE
Augean (AUG) 32 Aim
AXA Defensive Distribution 23 Fund
AXA Distribution 23 Fund
AXA Ethical Distribution 23 Fund
BAT (BATS) 23
Begbies Traynor (BEG) 35 Aim
Berkshire Hathaway (BRK.A:NYSE) 16 NYSE
BESI (BESI:AS) 37 Amsterdam
BG (BG.) 23
BMW (BMWG:DE) 48 Frankfurt
BP (BP.) 23, 49
Bovis (BVS) 8
British Land (BLND) 25, 26, 27
Britvic (BVIC) 40, 41, 43
BT (BT.A) 23
Cadence (CDNS:NDQ) 36 NDQ
Character (CCT) 7 Aim
City Natural Resources 26, 27, 28 Fund
High Yield (CYN)
Communisis (CMS) 35
Computacenter (CCC) 15, 20
Conygar (CIC) 50 Aim
Cove Energy (COV) 30 Aim
CSR (CSR) 36
Diageo (DGE) 40, 42, 43
EnQuest (ENQ) 6
Essar Energy (ESSR) 47
ETFS Corn (CORN) 31 ETP
ETFS Physical Palladium (PHPD) 31 ETP
ETFS Soybeans (SOYB) 31 ETP
Eurasian Natural Resources (ENRC) 7, 47
Evraz (EVR) 47
Fairpoint (FRP) 32 Aim
Fenner (FENR) 12
Ferrexpo (FXPO) 47
First Quantum Minerals (FQM) 7
Fresnillo (FRES) 47
Gazprom (OGZD) 46, 47 GDR
GKN (GKN) 15, 20
GlaxoSmithKline (GSK) 23
Hargreaves Lansdown (HL.) 54
Heineken (HEIA:AS) 43 Amsterdam
Henderson Strategic Bond 26, 27, 28
Hogg Robinson (HRG) 15, 20, 35
HSBC (HSBA) 23
IDOX (IDOX) 15, 21 Aim
Imagination Technologies (IMG) 36
Inmarsat (ISAT) 23
Intel (INTC:NDQ) 36, 37 NDQ
International Personal Finance (IPF) 10
IQE (IQE) 36
iShares FTSE BRIC 50 (BRIC) 48 ETP
iShares MSCI Turkey (ITKY) 48 ETP
ITV (ITV) 28, 34
JJB Sports (JJB) 33
Johnson & Johnson (JNJ:NYSE) 6 NYSE
Kingfsher (KGF) 15, 21
Kraft (KFT:NYSE) 25
Kulicke & Sofa (KLIC:NDQ) 37 NDQ
Lam Research (LRCX:NDQ) 37 NDQ
Lansdowne Oil & Gas (LOGP) 34 Aim
Lukoil (LKOD) 46, 47 GDR
LVMH (MC:PA) 25, 26, 43 Paris
Marks & Spencer (MKS) 4
Marwyn Management 4 Aim
Partners (MMP)
Mears (MER) 15, 21
Microgen (MCGN) 33
Motorola (MOT:NYSE) 16 NYSE
Nautical Petroleum (NPE) 6 Aim
Nestl (NESN:VX) 25, 26, 27, 28 Zurich
Nichols (NICL) 10, 40, 41, 42, 43
Norilsk Nickel 47 GDR
Novatek 47 GDR
Novellus (NVLS:NDQ) 37 NDQ
Novolipetsk Iron and Steel 47 GDR
Pan Arican Resources (PAF) 15, 22
Paragon Entertainment (PEL) 4 Aim
Phoenix IT (PNX) 15, 22
Portmeirion (PMP) 34 Aim
Premier Foods (PFD) 18
Promethean World (PRW) 35
Providence Resources (PVR) 34 Aim
Pure Wafer (PUR) 36 Aim
Rmy Cointreau (RCO:PA) 43 Paris
Renew (RNWH) 35, 50 Aim
Renishaw (RSW) 37, 39
Rexam (REX) 28
Rio Tinto (RIO) 46
RM (RM.) 33
Rosneft (ROSN) 46, 47 GDR
Royal Dutch Shell (RDSB) 23, 25, 27
RPC (RPC) 15, 22
SAB Miller (SAB) 40, 41, 42, 43
Sagentia (SAG) 33 Aim
Samsung Electronics (005930:KS) 36 Seoul
San Leon Energy (SLE) 34 Aim
Sberbank (SBER) 46, 47 GDR
Severstal 47 GDR
Smith & Nephew (SN.) 6
Spectris (SXS) 13, 37
Sports Direct International (SPD) 33
SQS Software Quality Systems (SQS) 11 Aim
St. Jude Medical (STJ:NYSE) 6 NYSE
Stanley Gibbons (SGI) 15, 22 Aim
STMicroelectronics (STM:PA) 36 Paris
Stryker (SYK:NYSE) 6 NYSE
STV (STV) 34
Sumitomo Precision (6355:T) 37 Tokyo
Synopsis (SNPS:NDQ) 36 NDQ
Templeton Growth 16 Fund
Texas Instruments (TXN:NYSE) 16, 36 NYSE
Threadneedle High Yield Bond 26, 27, 28 Fund
Threadneedle UK Property 26, 27, 28 Fund
Tikit (TIK) 51 Aim
Tokyo Electron (8035:T) 37 Tokyo
Tristel (TSTL) 51 Aim
Tullow Oil (TLW) 8
Umeco (UMC) 8
Unilever (ULVR) 25, 27
Uralkali 47 GDR
UTV (UTV) 34
Victoria (VCP) 35
Vodafone (VOD) 23
VTB Bank 47 GDR
William Hill (WMH) 12
Wolfson Microelectronics (WLF) 36
World Careers Network (WOR) 35 Aim
WPP (WPP) 25, 27, 28
XP Power (XPP) 7
Zimmer (ZMH:NYSE) 6 NYSE
Zytronic (ZYT) 35 Aim
TRADE EFFICIENTLY
Figures relate to Nov 2011
LOSSES CAN EXCEED YOUR INITIAL DEPOSIT

Shares

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Shares

Uploaded by

Copyright:

Available Formats

GREAT

You might also like