Sunday share tips: Direct Line, Bumi, Dairy Crest

14th Oct 2012 15:32

Last week Direct Line, one of Britain's biggest motor and home insurers, hit the stock market. It was a roaring success, with the shares climbing 7 per cent on the first day. "I am wary of the sector, but investors were right to buy into Direct Line," the Sunday Times´Danny Fortson says. "My interest stems from the structure and timing of the float rather than the business's fundamentals," he adds. Only 34.5 per cent of Direct Line was sold in the first of what could be six or seven runs at the market and the company is being sold by Royal Bank of Scotland, under the orders of the European Union. Furthermore, it has to sell out entirely by the end of 2014, so RBS has to keep on the right side of the market, he goes on to explain. Direct Line is halfway through a turnaround plan ? it did not set aside enough cash to cover the soaring costs of car crashes. Nevertheless, without the timetable enforced by the EU, the bank would have preferred to hang on to Direct Line for longer to milk its juicy dividends. Over the next two years, as RBS continues its sell-off, Direct Line will be under pressure to keep on delivering value for shareholders. The results will have to look good. It should be an interesting investment ? and is promising a dividend yield of about 7 per cent. Sounds like a "buy" to me, Fortson writes. Whether one regards it as raping the Earth or fuelling the future, mining is always a rough old game for those involved - and sometimes for investors, too. Last week the Bakries said they wanted to buy back the mines in return for giving back their 23.8% stake in Bumi as well as cash in a deal worth £930m. This equates to about £4.80 per share, less than half the £10 a share at which the firm listed. Some analysts reckon the deal would enable Bumi investors, whose shares fell 90 per cent before the offer became public, to get out of a big mess with some cash. Rothschild, who owns about 12% and who declined to comment, is understood to believe the Bakries are trying to buy the assets on the cheap. It is all a sad end to a venture that promised investors they would get their money back 'two or three times' over. However, the collision of Western corporate governance standards and the freebooting world of mining is often troubled. Whatever the outcome of the report and of the Bakries' efforts, the affair has given investors one more reason to look warily at overseas mining ventures and complex company structures. It has also severely tarnished Rothschild's reputation for good judgement, a blot that many believe will take some time to fade away, The Financial Mail on Sunday says.Pretty soon Britain's second-biggest milk processor, Dairy Crest, will have to make a choice: jump into the water and swim, or get swallowed up by the sea. The dairy industry is in the midst of violent change. In the past year, Dairy Crest's two domestic rivals have been gobbled up by deep-pocketed foreign predators. Robert Wiseman fell to Germany's Müller, while Milk Link combined with Arla, the Danish co-operative. That has left Dairy Crest exposed. Its problem is that its core liquid milk operation ? pasteurising and processing milk for the masses ? is barely break-even. It brings in more than £1bn in annual turnover ? roughly two-thirds of Dairy Crest's total business ? yet profits were less than 1%. For processors, the key is branded yogurts, butters and cheeses. The margins are miles better. Dairy Crest needs to beef up beyond milk, and it has the cash to do so. It banked £347m from the sale of its European spreads business, St Hubert, this summer. Word around the cheese tray is that it has drawn up a list of targets. What is clear is that Dairy Crest is fast approaching its sink or swim moment. Its shares, which closed on Friday at 344p, are cheap. Despite the challenges, European rivals have cast a ravenous eye on Britain. Dairy Crest had better get its water wings ready, The Sunday Times´ Inside the City column says. ABPlease 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.