Investment Column: BG Group is cooking on gas, so keep buying

HMV; Mecom

Our view: buy

Share price: 1103.5p (- 6.5p)

It's been a busy week for BG Group. The company announced first-quarter results yesterday showing profits of $960m (£628m), a 5 per cent fall on the same quarter in 2009, blamed on depressed gas prices. But elsewhere the results were more positive, with underlying profits up by an expectations-beating 13 per cent, thanks to a 6 per cent rise in production to 61.3 million barrels of oil equivalent.

Alongside the results, chief executive Frank Chapman also fielded charges from the Kazakh government that the BG and Italian partner ENI overstated the costs of the Karachaganak project. Mr Chapman deflected the criticism, saying he is "optimistic" about an amicable settlement.

And earlier in the week, the group sold its 50 per cent stake in the Seabank gas-fired power plant in Bristol for £212m. The sale, to Cheung Kong Infrastructure Holdings, is BG's second UK power-station sale this year, as the group moves further from its utility background and focuses more on production. It is this ongoing shift in focus that is germane for investors.

Sluggish economic growth, surging US production from shale gas, and ever-increasing supplies of liquefied natural gas (LNG) to the global market may be a drag on gas prices in the current climate, but that will change. BG's impressive portfolio – particularly in the giant sub-salt fields off Brazil and in Australia's coal-seam gas sector – should give investors pause for thought, regardless of the short-term dynamic. Australian LNG trains are well-placed for the booming Asian market. And BrazilÕs Santos Basin has seen unprecedented exploration success in recent years.

Fred Lucas at JP Morgan Cazenove puts the group's multiple at 14.7 times, 2010 forecast earnings. That puts BG some way below the 28 times of the company's nearest peer, Australia's Woodside. When we looked at BG last year, we said "buy" and since then the shares have risen by nearly 10 per cent. So keep buying.

HMV

Our view: buy

Share price: 72.3P (-6.8p)

Simon Fox, the chief executive of HMV Group, faced brickbats in January following a dire Christmas performance at its Waterstone's book chain. Yesterday, it was the turn of the HMV chain proper to be in the doghouse, following a 13.2 per cent slump in underlying sales at the entertainment retailer's UK and Ireland operation for the 16 weeks to 24 April.

Mr Fox – who has taken the plaudits for turning around the fortunes of the chain since joining in 2006 – blamed January snow and a reduction in promotional activity as he seeks to preserve margins. They should be up by 50 basis points for the full year. Management say they remain confident that the group's 2009/10 underlying profits will be in line with forecasts.

Above all, shares in HMV Group are cheap trading on a 2011 forecast multiple of just 6 – a 50 per cent discount to the retail sector.

Granted, both HMV and Waterstone's face strategic challenges, but Mr Fox has already taken major strides to broaden HMV's revenue stream including purchasing Mama, the live music owner, moving into fashion and opening cinemas. Rivals Woollies and Zavvi are also dead and buried.

As a result, we think that while HMV is risky stock, at the current knockdown price the group's shares have life in them. Buy.

Mecom

Our view: Sell

Share price: 232p (-175p)

Mecom, the company set up by former boss of the Mirror Group David Montgomery, owns 300 printed titles and 200 websites across the Netherlands, Denmark, Norway and Poland. The group was hit – along with much of the publishing industry – by the collapse in advertising revenues and was forced to restructure last year, selling off businesses, slashing costs and tapping investors for cash to sort out its debts.

Mecom yesterday said advertising declines have now slowed too (they fell 3 per cent in the first quarter, although the comparatives are not the toughest), and costs were shaved by 7 per cent. The operation is also looking for new revenues through paid content and online advertising.

But house broker JP Morgan Cazenove has the price at 15.3 times estimated 2010 earnings, which puts it at at a premium to a few of its closest European rivals. The wider economic case for the publisher is still unclear, especially with the lack of confidence in the advertising market recovery over the longer term, and with the company unlikely to pay a dividend until the end of full-year 2012. Sell.