Investors should shun Cookson's rights issue

Cattles worth holding onto; Edinburgh Oil & Gas looks cheap

Should Cookson's shareholders subscribe to the electronics group's £278m rescue rights issue? Its institutional shareholders, hedge funds and Cookson's own spin doctors are playing a complex tactical game in the run up to next Wednesday's deadline, but the private shareholder would be best off staying out of it. They have lost plenty enough of their money already and too many question marks remain.

Will the rights issue be successful? Everybody is watching everybody else. If enough people believe it will succeed, they will subscribe, making it a success. Hence Cookson's keenness to publicise the 49 per cent of shareholders who have made an, albeit non-binding, pledge to subscribe.

But so what if it is successful? It is not certain Cookson's discredited management can rescue the company. A £1bn acquisition spree to build up the now loss-making electronics business left the company with debts of £750m just as demand for its products collapsed. The interest bill would fall from about £60m a year to £40m if all the money is raised, and the banks will at least temporarily be off the company's back. But Cookson does not have a good track record of generating cash from its assets, and nobody is confident it has bought the best businesses during the New Economy investment boom.

Having sacked 3,500 employees, the group is leaner than it has been, but cash will remain tight and all its divisions faces challenges. The ceramics side needs a prolonged recovery in steel production, the precious metals division needs consumer spending to remain robust, and there is a glut of electronics capacity.

At this stage, it does look as if a decent majority of shareholders will take up their rights, but the risk is the small shareholder will be throwing good money after bad when there are stock market bargains elsewhere. Much of the collapse in Cookson's share price is down to hedge funds, who sold borrowed shares in the hope of picking them up at around the rights price of 25p. Analysts predict the shares may bounce to 40p to 50p if the fund-raising is well supported. That would only marginally reduce existing losses, and there is no guarantee investors would be able to get out quickly enough to make a profit from the rights. It's not worth it.

Cattles worth holding onto

You could almost hear the sigh of relief when the Cattles results came out yesterday morning. The company lends money to those deemed too much of a credit risk by the high street banks, or to the small-time tradesmen working in the grey economy, and there had been concerns that bad debts were heading through the roof. Séan Mahon, the chief executive, professed himself mystified as to the source of the scares: the actual figure for bad debts was 8.9 per cent, exactly the same level as in the first half of last year.

Mr Mahon says the stable bad debt ratio proves that customer growth has not come at the expense of credit quality. The trick, he says, is to ground the business and its lending decisions in the local community. The company has a network of 481 branches and an army of "ladies from Cattles" who make the weekly or monthly call to collect repayments. The low bad debts make up for the higher overheads.

The figures were very good indeed. Pre-tax profit was up 15 per cent to £36.9m, and the company raised the interim dividend by 15 per cent as well. This drove Cattles' shares up 14p to 310p, where they have a dividend yield of about 3 per cent.

Of course, the company is not recession-proof. A serious jump in unemployment would be enough to put a lot of Cattles' customers into financial difficulties. But for now, economists are not forecasting a steep rise in the jobless total and the worries of a slowdown are in fact working in Cattles' favour. The high street banks have been noticeably shaking out their riskiest customers, and these fall direct into the path of Cattles, where they are likely to be among the most trustworthy repayers. The company's growth rate seems sustainable, barring economic shocks.

Valued at 15 times this year's forecast earnings, Cattles shares are worth holding.

Edinburgh Oil & Gas looks cheap

A bird in the hand is worth two in the bush unless one of the birds in the bush is a Buzzard. And Edinburgh Oil & Gas has more than 20 million barrels of oil from the Buzzard oil field in the North Sea to look forward to from 2005.

EOG was last year's best performing share rising 500 per cent on the news it and its bigger partners in Buzzard had struck black gold with the biggest North Sea find in more than a decade.

Results yesterday showed the discovery came not a moment too soon, since the company made virtually no profit from its legacy business storing gas for ScottishPower and reduced oil and gas production from its onshore wells in the UK. Low electricity prices have reduced demand.

The onshore work is peripheral for EOG now, though the cash it generates will come in handy as it pumps money into development work in the North Sea. It owns 5 per cent of Buzzard in a joint venture which includes BG Group and EnCana, a Canadian oil giant, and has started exploring close to the Buzzard site, too.

After a rights issue and the disposal of some non-core businesses, EOG is sitting on £4.5m, which is likely to cover its share of the development costs before the banks will be willing to finance Buzzard. The field is economically viable even if the oil price, now nudging $30 a barrel, halves.

Based on the prices of recent acquisitions in the sector, the Buzzard stake is probably worth £1.20 to the EOG share price, up 3p to 104.5p yesterday. It is undervalued.