Investment Column: Wake up to BG Group's huge opportunity

Rathbone Brothers; Halfords

Our view: Buy

Share price: 1050p (-29p)

"The market is waking up to the fact that this is a gigantic opportunity for BG Group," Frank Chapman, the oil and gas giant's chief executive, said yesterday of the company's ultra-deep water exploration in Brazil's Santos Basin. Brazil is certainly where all the excitement is for BG.

A string of major discoveries over the past few years has yielded reserves of more than three billion barrels of oil equivalent (boe). The current extended well test at the Tupi field is producing excellent flow rates, while new projects at Iara and Guara are both progressing well.

But the energy market is a tricky place to be, with the oil price still down by 52 per cent from last year's high, and Henry Hub gas prices down by 66 per cent. Yesterday's second-quarter results showed BG's underlying profit down by 37 per cent at £507m, with revenues of £2.32bn some 28 per cent lower despite the benefit from sterling's fall against the dollar. And BG's ramp up of cost-intensive projects, including offshore Brazilian fields, has doubled its borrowings to more than £2bn.

But there are upsides. The group's profit met expectations, and gearing of 13.8 per cent is way below its 25 per cent ceiling. BG has increased production by 7 per cent over the past six months and, although the 2009 target of 680,000 boe is likely to be put back until March, its long-term aim of between 6 and 8 per cent growth per annum remains unchanged.

So recent fluctuations in BG's share price, from 1162p in early June to 979.5p earlier this month (it has recovered since) suggest it is time to buy. The rating, at 14.3 times next year's earnings, is not overly demanding, although this stock, with its 1.3 per cent yield, is not for income seekers. Gordon Grey, at Collins Stewart, said: "We would view any weakness as a buying opportunity as the long-term growth outlook seems very much intact." We agree. Buy.

Rathbone Brothers

Our view: Sell

Share price: 741p (-44p)

It certainly could be worse for Rathbone Brothers. The core discretionary fund management business – where wealthy people pay the company a pretty penny to oversee their money – has actually taken extra funds under management over the past six months at a time when many are seeing the reverse happening. But to call a 41 per cent fall in profits to £14.1m "satisfactory" suggests a worrying complacency, particularly given that this was below the consensus forecast. After all, the company's unit trust business is not in the same sort of health and the banking business is poised to take a nasty hit. It saw a margin boost in the first quarter as the interest Rathbone paid to its clients fell along with base rates, while the company was making 6 per cent through long-term deals. Those deals are due to unwind. What is more, plans to tighten regulation of banks are bound to increase its costs. It also remains to be seen how long clients will be willing to pay high fees for discretionary management while they watch their investments fall in value.

It is not all bad news for Rathbone. The company is making money, after all, and costs are being attacked. It is conservative, defensive and unlikely to take any crazy risks. But given that, and yesterday's lacklustre performance, it is hard to see it deserving of a multiple of just over 17 times next year's forecast earnings.

The yield, at 5.4 per cent, is okay but only just covered by earnings. A market recovery would benefit Rathbones hugely, of course, and there are signs of that happening. But there are others that would arguably benefit just as much while offering rather more attractive growth opportunities. That is why we say sell, and use the money to seek them out.

Halfords

Our view: Buy

Share price: 348p (+7p)

Halfords has again signalled that sales of satellite navigation systems, which veered off course at the end of last year, are still falling, albeit in line with expectations. While this hit the group's overall sales in the second half of the year, Halfords got itself back on track by changing its product mix towards bikes, camping and travel equipment such as roof racks. Sales of these products are strong and revenues from its "We Fit" service for car parts motored in the 13 weeks to 27 June.

The overall 1.3 per cent uplift in like-for-like sales was solid and the increase in its gross margins will be at the top end of a 50 to 100 basis points forecast. There are a few issues ahead, including rising unemployment, a rise in VAT in the new year and a store opening programme at the low end of forecasts. But thr group's forward price-earnings ratio is a modest 10.4 for 2010 and the forecast yield is 4.9 per cent. Despite a sharp jump since the depths of the autumn, Halfords' shares have a clear(ish) road ahead. Buy.