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Sunday tip round-up: Molins, Essar, Elementis

Date: Sunday 04 Mar 2012

Sunday tip round-up: Molins, Essar, Elementis

Engineering group IMI posted an excellent set of full-year numbers on Friday, as its strategy of focusing on "sweet spot" products with high margins bears fruit. The majority of the company's business is comprised of fluid control systems – such as valves for liquefied natural gas (LNG) plants and power stations, as well as air conditioning units. Just over half of IMI's operations are now positioned within the "sweet spot", which is characterised by higher growth, higher margins and greater resilience. Over time, management expects to increase this proportion significantly. This focus has resulted in margins hitting a record high of 17.5%, up from 16.7%, which is just shy of the company's target of 18%. In the year to December, revenues rose by 12% to £2.13bn and, when one-off items are stripped out, profits rose 19% to £363m. The total dividend for the year rose by 15% to 30p. Consensus forecasts are likely to edge higher following the numbers. Growth is now expected – albeit at a slower rate than seen last year. The shares were last tipped as a buy in The Sunday Telegraph at 758p on October 9th last year and they are up 31% since then, compared with a FTSE 100 up 12%. Trading on a December 2012 earnings multiple of 12.3, falling to 11.3 next year, the shares are now rated as a hold.

Shashi and Ravi Ruia listed Essar Energy in London to raise funds to build more power stations. That in a country which is structurally short of power and needs significant investment in new generation capacity if its economy is to continue to develop. The current shortage, at peak times, is running at about 10%, whereas in the UK there is a peak surplus of 15% to 20%. The group built its power plants with a view to using coal blocks that the government has allocated for this purpose. But the government has failed to give consent to start mining; so Essar is buying more expensive coal from abroad. Last month, Dr Manmohan Singh, India’s prime minister, hosted a one-day summit to try to find a resolution. A decision is yet to be made. Essar also faces the imminent prospect of paying $1.23bn in sales tax to the Indian state government. Should the regulatory issues in India, relating to forest clearing, be resolved and a new share issue at India-listed subsidiary Essar Oil go well, then there is plenty of up-side. However, the Indian situation could drag on for some time, so it is one to avoid until the situation becomes clearer. Nonetheless, bold investors may wish to have a small holding in the speculative part of their portfolio, says The Sunday Telegraph´s Questor team.

Chemicals group Elementis makes highly specialised products used in a bewildering range of sectors, from oil drilling to industrial paints to cosmetics, and it does so very profitably. It produces additives that have an effect on the way liquids behave, such as how well they flow, whether they spatter or whether they form a level surface. These have a huge range of applications, paint being the most obvious. The group also owns the world’s only hectorite mine, in California. Hectorite is a white clay that is used in many of these specialty products. For the Midas team, at the Financial Mail on Sunday, Elementis has enjoyed an excellent 2011, demonstrating strong growth in sales but even stronger growth in profits. The outlook is positive, particularly if it can continue the growth seen in its sales to the oil and gas sector as it expands into more unconventional methods of drilling. At the same time, management has shown its ability to raise profit margins. The cash pile may provide opportunities for growth through acquisition, but failing that the group could decide to return some of the cash to shareholders. At 1761⁄4p a share, the group is conservatively valued against current earnings. Midas says Buy.

Writing in this weekend´s Financial Times David Schwartz singles out Molins for special attention. Mr.Schwartz highlights the fact that the company, which produces tobacco and packaging machinery (and offers product testing services) announced a sharp rise in 2011 earnings. Even better, he says, the company is optimistic as regards its future and has increased its dividend. Furthermore, at a forward PE of 6.5 its shares´ valuation is currently quite low. As well, the stock price has been moving inside a rising up-trend channel for the past two years. Lastly, he extolls the company´s hidden value. Tobacco testing regulations in the US are changing, with responsibility recently being assigned to the Food and Drug Administration (FDA). The FDA is setting up a testing program which will require tobacco products to be evaluated on up to 96 potentially dangerous chemical compounds. Molins should benefit once the FDA testing protocol is published later this year.

AB

Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.

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