Net income of £3.4m in the three months to April is a lot better than the £62.4m loss the year before. The number of bets placed was up a quarter, at £364m, with Euro and Aussie punters making up 96% of that revenue. This sparked a rise in the shares and analysts think the firm has turned the corner.

But there is still much further to go. The group’s shares slumped 30% in the past 12 months as the loss of an audience in the US, where online gambling was outlawed in October 2006, hit profit forecasts and broker recommendations knocking Sportingbet’s market cap down £50m.

The brokers now see an opportunity, “[The results] clearly demonstrate that Sportingbet has regained positive momentum across the group,” said Richard Carter at Numis Securities.

With major football contest Euro 2008 kicking off this summer, the firm is “confident of meeting” forecast earnings of £7m for the year.

It’s not all good news mind you. Some Sportingbet employees were arrested by the Turkish authorities last Thursday.

The nature of the arrests is suspect as Sportingbet has previously locked horns with the state-backed gambling business Spor Toto. With the investigation ongoing, McIver reassured investors, “It’s had absolutely zero impact on our operations in the area.”

Having made £200m in Europe in the third quarter, and bullish forecasts for the region, this much is evident.

Gambling Is FTSE’s Safest Bet

The betters market might be a great ‘recovery stock’ play.

The sector had its wings clipped in November 2006 when US authorities — in what was widely panned as a protectionist move — banned online gambling Stateside. This had a punishing impact on industry players like Sportingbet and 888 but it was PartyGaming that suffered the most agonizing fall from grace.

The bookie’s shares fell so hard that FTSE index experts took the unprecedented step of booting PartyGaming out of the FTSE 100 without waiting for the quarterly rebalancing.

However, like a phoenix from the flames, all three firms are back in the black.

888 recently boasted 2007 results way ahead of estimates and nudged forecast 1% higher for 2008. PartyGaming also posted “strong growth” and a 21% hike in first quarter revenues.

The stocks are being plugged as a recession-proof industry. This belief, propagated by 888 chief executive Gigi Levy, is based on the rationale that as the economy heads south, people are more likely to stay in and log on than go out.

Not only that, but the gamblers might also get some closure on the American situation. Sportingbet and PartyGaming sat down with the US Department of Justice to try and reduce any fines against the two firms that ‘illegally’ took bets from Americans before the sites were barred.

Sources close to the matter suggest that these talks are going very well… PartyGaming’s shares have rallied as relieved investors look forward to finally putting this circus behind them.

IG Group Spreads Its Operations

Looking for another way to speculate on other people’s speculations? Take a look at IG Group. This spreadbetting and CFD group are doing a fine trade through the market turmoil, specialising as they do in short-term trading services.

Following up soaring revenues in March, IG has produced a bullish trading statement that “current trading remains strong” and the firm is optimistic on the full-year prospects.

Trading is expected to be 50% higher at around £184m from £122m the year before driven by expansion in France and Spain.

“While it remains difficult to predict future trends in volatility or customer reaction to any change in market conditions, IG is well positioned for further growth,” the company said in a statement.

A growing business, still in its infancy… IG Group looks like a good move.

However, as with Sportingbet and 888, this virtual gambling business is subject to potentially market-changing legislative risk. The weaknesses were clear in November 2006.

Should a government introduce new laws to curb gambling, and they tend to with these ‘vice stocks’ — smoking, alcohol and gambling — then the afflicted firms would be painfully short on options.

If smoking were outlawed worldwide, British American Tobacco would still have a stockpile of valuable physical assets. With online businesses like Sportingbet and IG Group, the core business is the only business. This represents huge potential volatility, as long-time investors in these markets will attest.

There is a less risky way to capitalise on ‘recession-proof’ shares. An opportunity, currently running in The Fleet Street Letter, that has already turned a profit for subscribers.

Theo Casey

Source: Sportingbet Profits Mark Turnaround

This will see small companies, whether on the main market or AIM, offered the chance to pay £10,000 for a year’s worth of independent research prepared by one of three firms, Argus Research from New York, Chicago’s Pipal Research and our very own International Investment Research Plc.

Naturally I am pleased to see the LSE at least acknowledge that the share prices of small companies often bear no relation to the performance of the business itself, and that this is a real concern not only for investors but also for the many small companies that want to be able to issue new shares at a fair price.

But will this new measure really offer ‘huge value’? After all independent research is not new.

Filling the gap

In the old days a company’s stockbroker was responsible for writing research notes, partly to inform the market and partly to drum up some business for itself. Finding that the illiquidity of small companies defeated this latter purpose, many stockbrokers have simply abrogated this responsibility to the disgust, I might add, of many of their clients.

Into this gap have stepped a number of independent research houses such as Edison and Hardman that will write research notes to order, for a fee of something in the region of the £10,000 that the LSE is charging for its new service.

Nobody, of course, really believes that this research is truly independent. The researcher will be briefed by the company, and the research note will be vetted before it is published. If an ‘independent’ research firm has ever thanked a client for the commission by publishing a sell recommendation, I haven’t seen it.

The new venture sounds slightly different. The research note will be written by one of the three appointed firms ‘on a pre-determined allocation basis’ which I assume means that the company itself does not get to choose which of these three it will be. And ‘the research will consist of comprehensive factual information and analysis’ and ‘will not be investment advice and will not make recommendations.’

This immediately raises one question. Will companies be prepared to pay £10,000 for a research note over which they apparently have no control, and which does not conclude with a recommendation for the shares? A second question concerns the contents of these notes.

Apart from ‘comprehensive factual information’ we are promised that ‘the research providers have agreed to share common methodologies and produce reports that follow a uniform presentation format, in order to facilitate cross-company and cross sector comparisons by investors.’

Some bright spots

I like the sound of a common methodology, although I wait to see how this will enable us to compare the merits of, for example, an oil explorer and a software provider. But how much new information will these notes bring to investors?

The basis of the LSE’s initiative is that there is a lack of information about small companies; that more information will mean that more opinions are formed; that more opinions will lead to more trading in the shares; and that the result will be a more accurate pricing of small company shares.

However, there has been a massive increase in the amount of information that is available to investors in the last few years – but it seems to have done very little for the pricing of small company shares.

Whereas two or three years ago it could be quite hard to get hold of information about small companies, today just about each one has a very comprehensive web-site, featuring a description of its activities, past copies of annual and interim reports, biographies of the directors, and sometimes broker research notes. Indeed, my very own articles from Red Hot Penny Shares have been known to appear on company websites.

So companies have made a big effort to inform the market and if it has had no effect it can only be for one of three reasons. Either very few people are actually reading it – as I am sure is the case. Or the huge increase in the number of small companies trading on the LSE has simply overwhelmed the market’s capacity to absorb all that it should know about them – which I also think is the case.

Or people have been reading this information, but simply don’t believe that it tells the full story.

It is of course inevitable that companies do not publish negative information about themselves, either via a corporate website or via a note written by an ‘independent research house.’

What intelligent investors really want to see is an informed assessment about a company’s product written perhaps by an industry specialist, and a suitably cautious and sober assessment of its position vis-a-vis competitors.

If these newly appointed research houses can provide these perspectives they could make a useful contribution. But the old problem remains – will small companies be prepared to pay £10,000 for a note that draws attention to their weaknesses? And if not, is it worth having these ‘independent’ notes written in the first place?
Regards,

Tom Bulford
for The Penny Sleuth

Source: The London Stock Exchange Listens to the Sleuth

It wouldn’t have been a bad idea. In the last year, the junior Alternative Investment Market (Aim) index has fallen around 14 per cent while the FTSE 100 is down only 6.5 per cent. Admittedly, you’d have been better off in cash – you’d have made 5 per cent there. But, relatively speaking, at least the experts were right.

Now, however, it’s all the other way around. If you are looking for fundamentally cheap investments, you need to be looking at Aim where the average price-earnings (p/e) ratio has fallen to a mere 6.3 times.

There are 1,600 companies listed on this market, so there are obviously huge variations within this – miners and oil companies trading on p/e ratios of 20-plus and the odd outlier, such as fashion super-success ASOS (LON:ASC), trading on 40 times. Even so, talk to a small-cap fund manager of any kind, and he’ll be quick to point to a pile of favourite stocks all throwing off cash yet selling in the market for the bargain prices of 4r or 5 times earnings.

One example is AT Communications (LON:ATCG), a perfectly respectable telecoms company on a historic p/e of 5 times and a prospective p/e for 2008 of a mere 4.75 times.

So just why are there so many apparent bargains about? One answer might be, tax.

Until recently, capital gains on Aim-listed stocks were taxed at only 25% of the normal rate for higher-rate taxpayers, as long as you held the stocks for two years – so an effective rate of 25% of 40%, which is 10%. Now, however, you pay 18%, just like anyone investing anywhere else.

Then there is inheritance tax to consider. Certain Aim stocks are immune from inheritance tax. But now that couples are able to leave their nil-rate bands to each other (automatically combining their tax- free allowances) perhaps fewer people feel the need to bother with the kind of estate planning that Aim provides.

Of course, there is – as there should be – more to this than just tax. There’s also general risk-aversion. Smaller companies tend to be more geared to the domestic economy than larger multinational companies so, when things turn down, their shares inevitably suffer more than most.

And things are turning down in the UK – big time. The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to “melt up” – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.

However, an annual survey of the market from Baker Tilly and Faegre & Benson, entitled “Taking Aim”, throws another kind of light on the way things have changed in the market.

Back in 2005, there were 335 initial public offerings (IPOs) on Aim, raising an average of £17m each. In 2007, there were 82, but the average amount raised was a massive £231m. In some ways, this might look like a good thing – more money was raised in total. But for real smaller companies it might not be.

Why? It suggests, says John Glencross of Calculus Capital, that the London Stock Exchange (LSE) and the companies that work as brokers to Aim-listed companies are more interested in marketing Aim as a home “to foreign companies seeking an international listing, where the amounts involved are very large, than to growing UK companies which typically want under £10m”. A number of last year’s listings were also large funds of one sort or another, or property-related companies.

For these overseas companies, and the brokers getting paid for bringing them to the market, Aim also presents an opportunity for a form of regulatory arbitrage. Its relatively light regulation and less-than-arduous listing requirements make it an easier place to get a fundraising away – and earn those commissions.

This makes sense, of course, in that both the LSE and the brokers are looking to make money, and you make more from big listings and secondary fundraisings than small. But it does make it hard for small companies to get their hands on funding.

This might be the key to the low-looking valuations. Right now, a small company, however good, doesn’t really have anywhere to go to get money to expand. The banks are closed or upping their rates; the debt markets have never been small-cap friendly; and if they only want a few million, Aim isn’t suiting them very well either.

At the same time, liquidity has disappeared from the market itself. Spreads are wide and volumes are low. So buying and selling stakes in listed companies has become little easier than buying and selling in private companies.

The combination of these two factors means that, right now, being listed on Aim isn’t really all that different to being a private company.

And what do private buyers pay for private companies? It depends on all sorts of issues but, in general, the answer is around five times profits. Look at it like this and maybe the seemingly cheap stocks rattling around Aim aren’t so cheap after all.

It would be nice if there were something to be done about all this – small companies are incredibly important to the UK economy. But, as it probably won’t be, I think we can expect the sector to continue to be starved of both funding and investor interest. Both are compelling reasons not to leap in just yet.

Source: Why You Should Stay Away From the Alternative Investment Market

Floating out Fresnillo, the world’s largest primary silver producer, Penoles is valuing the subsidiary at a whopping $4bn.

The logic is that analysts prefer simple stories rather than trying to evaluate multiple-asset miners. Fresnillo contains just the group’s major precious metal operations. The Penoles structure, which survived 120 years of revolution and crises, is being dismantled to suit 21st century investors.

This IPO is deemed to be a success for London. Commentators are saying that Fresnillo’s launch in the City is part of a shift in corporate Latin America. Instead of using Madrid or New York for its capital raising, these guys are coming to London.

Of course, the London Stock Exchange (LSE) has worked hard to cultivate links with Central and South America. There’ve been loads of road shows extolling the virtues of a FTSE or Alternative Investment Market (AIM) listing. The LSE has met chief executives in Sao Paolo and Lima. Further road shows are planned in Chile and Argentina.

Hochschild, a Peruvian silver and gold miner, became the first Latin American company to float in London for a century when it listed in November 2006. Fortunately for the LSE’s marketing drive, its shares have since risen 20%. Andrew Wray, at bankers JP Morgan Cazenove, said: “New York used to be in the backyard for Latin American companies but they are increasingly turning to London, particularly resources companies, as so many others are listed here.”

The IPO is a success for its parent

The IPO seems to have been a success for Bailleres, too. Penoles’s shares jumped 8.14% on the Mexico City bourse to 346 pesos a share following news of the spin-off.

Fresnillo sold about 23% of its shares in London. It was hoping to raise around $1 bn in total. In the event, it brought in around
$900 m, but plans are to sell a further 2%.

Anyway, the company is large enough to move straight into the top London share index, the FTSE 100. The remaining shares will be held by Penoles.

Penoles’s precious metals division produced 34.4 m ounces of silver last year and a further 280,000 ounces of gold. It is Mexico’s second largest gold producer, with a turnover of $648 million.

The new company is named after its largest mine, in the Zacatecas region of central Mexico. Fresnillo also has a gold mine in the Sierra Madre mountain range of northern Mexico and another in central Mexico.

The money raised from the share placing will be used to pay off debt, finance the expansion of the Fresnillo mine and develop three other mines.

CEO Jaime Lomelin said at the IPO press conference that Fresnillo will ramp up annual production of gold to 400,000 ounces and silver output to 60 million ounces. “We have a lot of projects in the pipeline,” he told reporters.

Continues below

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Weaker metal markets took off some of the shine

Understandably, Fresnillo is forecasting that silver prices will stay high. Chief financial officer, Mario Arreguin does, however, expect “increasing volatility.”

His words might equally apply to the share price. The stock opened on the London Stock Exchange at 530p, touched an intraday high of 539.5p and hit an intraday low of 502p. The shares then closed at 520p, a decline of 6.3% from the IPO price.

Analysts said the fall reflected the recent retreat in precious metals prices. They also thought there was a lack of appetite for new issues after Czech coal miner New World Resourcesraised £1.1 billion pounds with an IPO in the same week.

But BlackRock fund manager Graham Birch, a big name in precious metal investing, hastened to defend Fresnillo’s virtue. He told journalists that he had bought shares in the IPO and was confident they would perform well over time.

“I think this is a really excellent company. We’re very pleased to have it in our precious metals portfolio,” he said.

Silver is certainly a way below its peak. It is around $17 an oz, having crossed the magical $20 line in March. Kitco, the precious metal commentators, share Fresnillo’s view that the price will remain volatile. They expect it to revisit $15.50 an ounce at some stage.

At the moment, however, chartists reckon the price movements are looking good. The 200 day moving average is on the up… an excellent sign!

The case for silver shouldn’t fade

Analysts GFMS believe that as long as gold prices remain strong, the case for silver investment will not fade.

They expect the rally to continue at least to the end of the year, and quite possibly into 2009. So, they see silver investment demand and price strength persisting.

More importantly perhaps, since investor sentiment can turn on a speck, industrial use of silver is still rising. Electrical and electronics fabrication accounted for the greatest increase.

So, keep mining.

Erin and Isabel

PS Make sure you don’t miss out on getting all the latest industry news in one daily hit with a brand new free eletter from Fleet Street Publications.

Source: The Case For Silver Investment Should Not Fade