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Hunt is on for signs of recovery in big oil

The Times

It’s been a rough few years for oil services companies and Hunting is no exception. The share price of the London-based maker of drilling tools, subsea equipment and valves has plummeted from 900p in August 2014 to below 250p in January.

Yesterday it produced a grisly set of results, including an underlying loss of $50.8 million for the six months to June 30, down from a $20.4 million profit a year ago. The size of Hunting’s debt facility also has been nearly halved to $200 million, with dividends suspended to 2018.

Oil services companies have borne the brunt of the downturn, as customers have cancelled projects and slashed spending. Where contracts have continued, those companies have had to accept far less lucrative terms than before.

However, times change. Oil prices are stabilising and there is an increase in the number of rigs operating in the key American market. The question now is whether Hunting is well positioned for a recovery and thus a shrewd buy for investors betting on an industry revival.

That certainly was the argument pushed by the company’s management yesterday, as executives spoke of a “fragile optimism” in the market. And it is true that Hunting is in a stronger position than some of its rivals. Management has wielded the axe, cutting staff numbers by 46 per cent to 2,145 since the end of 2014 and shutting three factories.

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Those measures have helped it to cut its debt to $87.5 million from $166.75 million a year ago. However, Hunting’s shares have enjoyed a significant bounce, up 26¼p to 488p yesterday, so those hoping to buy at the bottom of the cycle may have missed their chance.

The future of the oil services industry remains uncertain and any recovery is likely to be gradual. Moreover, Hunting, which specialises in subsea equipment and has a big presence in the troubled North Sea, looks underexposed to the sectors set to benefit most when the tide turns.

True, Hunting has a big US business, where conditions seem to be improving as frackers find new ways to pump oil at lower cost, so it may enjoy a boost there. Overall, though, conditions remain as murky as the holes that it helps to drill around the world. There could be another year or two of pain before Hunting reaches the sunlit uplands that investors are holding out for.

MY ADVICE Hold
WHY Hunting is likely to benefit from an oil recovery but conditions remain highly uncertain and it could take another year or longer

Belvoir
Belvoir is Britain’s largest property franchise group and the ambitious Mike Goddard wants it to stay that way. The chief executive and former RAF wing commander founded the company in 1995 as a small lettings business. It now has 306 outlets nationwide and manages 54,000 properties.

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Belvoir is in a bit of a sweet spot because it specialises in the rented sector, which is only likely to grow as buying a home remains increasingly out of reach for younger generations, even accounting for an expected Brexit dip in prices.

Belvoir, which floated on AIM in 2012, pays a generous dividend and its franchise system is likely to grow. The group buys small companies and converts them into Belvoir franchises. Franchisees pay an upfront fee to be part of the group and 12 per cent of annual turnover. They receive three weeks of initial training, updated legal advice, access to Belvoir’s website and being part of a well-known brand.

The first half was busy for Belvoir as it bought Northwood, an independent estate agency franchise with 86 letting agencies. That helped to drive a 60 per cent rise in interim revenue to £4.3 million and generated a 69 per cent rise in pre-tax profits to £1.3 million. Belvoir believes it can take advantage of consolidation in the fragmented buy-to-let market.

However, it said that lettings and sales had been unsettled in the first half because of the EU referendum result and the stamp duty increase for buy-to-let properties. That uncertainty may be around for a while. The shares fell 2½p to 133½p.

MY ADVICE Buy
WHY With a dividend yield of 6 per cent, this is a solid stock

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Dechra Pharmaceuticals
It has been quite a year for Dechra. The veterinary medicines business has bought three companies, paying $200 million for Putney to give it a pipeline of drugs in the United States, after the smaller acquisitions of Genera, a Croatian animal health products manufacturer, and Brovel, a Mexican manufacturer and distributor.

The last time Tempus checked on Dechra, after the Putney deal, we suggested taking profits. Although Putney’s price tag was punchy, yesterday’s results indicated that the acquired company has not provided any nasty shocks. Debt remains manageable, at about two times annual operating profit.

The core business is also doing well. The pharma business aimed at food-producing animals picked up speed. The nagging doubt remains that the valuation, at 27 times’ next year’s forecast earnings, leaves little room for a misstep, particularly on the delivery of the pipeline that underpinned the Putney deal.

With a business of increasing complexity, that is always a risk. Dechra has been sure-footed as it moves out of distribution to focus on pharmaceuticals and is worth keeping an eye on, but now is not the time to fork out.

MY ADVICE Avoid
WHY The valuation leaves no room for error

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And finally...
There’s many an airline dreaming of eastern promise at the moment, be it Middle Eastern superhubs or Far Eastern powerhouse economies, but Wizz Air can see bright horizons closer to home. The Hungarian budget airline said that its passenger numbers had risen by 16.6 per cent to 2.3 million last month compared with last year. The surge in traffic comes as the carrier said that it would add Satu Mare as its latest Romanian destination, launching a new service to London Luton.

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