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The Crystal Ball Is Out….

10 January 2023

….and to be perfectly honest I think I might flog it on Ebay. Last January it proved as much use as a chocolate teapot. After two years of pandemic the picture looked far rosier and the way looked clear for a reasonable economic recovery. Unfortunately, The Ball didn’t notice Vlad the Invader sitting just off-screen. Recovery was replaced with sky high energy prices invoking inflation such as we have not seen for decades, a 30% decline in global equities and a sell-off in bonds as interest rates were driven upwards. There was nowhere to hide. So, I’m putting the Ball back in its box ready for disposal and I’ll rely on the good old gut.

When all the news is rotten it is easy to slip into a slough of despond. However, as we have been saying for a while, inflation is likely to have peaked already and, with gas and oil prices continuing to slide, we should see a substantial fall in the numbers as the year progresses. So far, the Federal Reserve has been pretty hawkish on interest rates and this stance is likely to soften as the inflation outlook improves. The Bank of England has been a bit more reticent with its rate rises so it may take a little longer for it to moderate its actions and this lag could see the resumption of Sterling’s recovery versus the US Dollar.

The recovery in US and UK equities is still quite fragile so we should not expect an uninterrupted rise from here, especially if the Fed tightens a bit too much. Indeed, another bout of weakness would come as no surprise but, if it occurs, may well provide the last major buying opportunity before the next bull market establishes itself. We expect a much better second half to the year and, if the outside chance of a Russia/Ukraine peace deal were to actually occur, it would provide a major boost to markets.

Our own equity market is a bit distorted with a disconnect between the FTSE 100 and the other domestic indices. Heavily overweight in resource stocks and banks, the 100 has defied the weakness in other global indices and, as a result, its recovery will probably be more stunted than the norm. However, we expect the FTSE 250 constituents to continue to be a happy hunting ground for international predators and we envisage a much more noticeable recovery here and in many of the All Share Index stocks.

The European Central Bank, as ever, is likely to be late in its actions so will probably still be tightening the screws when everyone else is loosening. Avoid. China’s recovery is clouded by Covid continuing to run riot and, in line with our strong views expressed last year, we are still exiting that market on any strength. Japan still looks cheap but is likely to remain so. Emerging markets should be late beneficiaries once US interest rates peak and the Dollar weakens as a result. Our single country choice would be India where we still envisage five to seven years of major economic growth.

And so, to the January Napfest. Last year’s were a mixed bag with one early takeover producing an attractive gain, one marking time and one decline. Could have been worse, I suppose. Here we go with this year’s:

URA Holdings – ticker URAH (Russell)

A market cap of under £2m. Mining operations in Africa. I would probably struggle to find a more speculative situation. However, I believe the potential rewards justify the risk for those investors with the profile to accommodate it.

URA was an AIM listed cash shell which ran out of time to find a target and was consequently suspended in 2018. In March last year it completed the acquisition of mining assets in Zambia and had its quote restored on London’s main market. It promptly followed this with the purchase of GEM Venus, which holds the licence to exploit the historic Gravelotte emerald mine in South Africa and owns 74% of its equity, the other 26% being owned by the Black Economic Empowerment structure.

It is the Gravelotte prospect that excites me. It was a major producer of emeralds for 70 years and in the 1960’s was the largest in the world. For years the site lay idle. URA’s new Chairman (Ed Nealon) and CEO (Bernard Olivier), both industry veterans, were convinced the project was far from mined out and the subsequent independent JORK report they had completed mid 2022 certainly points to a similar conclusion. The report reckons Gravelotte has a mineral resource of 29m carats which, based upon the 113m carats produced in the earlier 70 years of operation, is the equivalent of around 20 years mining. Further, JORK reckons on an exploration target of between 168m and 344m carats which, even taking the mean of 256m carats, is pretty vast. Gemfields, the best known listed emerald miner, achieved $9 per carat for its lowest quality commercial output. That would put a conservative value of over $260m on Gravelotte’s 29m mineral resource – almost £200m for URA’s 74%.

The mine is open pit, making production relatively cheap and processing at its nearby plant requires only light crushing, jig separation and optical (laser) sorting so, again, a relatively cheap operation. URA is close to restarting production following upgrades and refurbishments to the site.

It seems to me that a market capitalisation of £1.9m at the current price of 1.4p per share takes no account of any of the above. Production is due to restart this year and I suspect that when its initiation is actually reported the market will reconsider the disconnect between the value of the company and the potential value of the asset.

Hargreaves Services – Ticker HSP (Stuart)

This is a diversified group offering services to the industrial and property/land sectors with the majority of revenues derived from the industrial space including a joint venture in Germany. The group remains resilient to the current economic challenges due to the nature of its contracts which number over 50 and are either term or framework agreements with either cost clause escalators or cost-plus arrangements.

The one weak area is the German joint venture which experienced a tough second half and lacks the visibility of earnings one would really like to see. However, despite this it is trading ahead of the reported comparative period. HSP is a contributor to the massive HS2 rail project and its £30.6m debt mainly comprises extra plant leases for this contract. Apart from this the balance sheet sports £18.1m of cash as at November 2022, up from £13.8m six months earlier.

Although the yield is only 2% the dividend should grow and the shares stand on a ridiculously low earnings multiple of less than 4 at the current price of 427p.  Hargreaves Services has a market capitalisation of just £135m so falls into the High-Risk category due to its size and investors require the equivalent mandate to accommodate them. However, I believe the shares should enjoy a re-rating this year.

DiscoverIE Group – Ticker DSCV (Neil)

This year I have gone with a top-down approach believing the Industrial sector will perform strongly in 2023. Several companies I spoke with at the tail end of 2022 were still experiencing supply chain disruption and I feel many will shift at least part of their supply chain closer to home or to friendlier nations. This led me to DSCV which designs and manufactures innovative electronic components used in a variety of industries from renewable energy and transportation to medical devices and more.

The company operates with 2 main divisions, Magnetics & Controls (M&C) and Sensing & Connectivity (S&C). The group operates across twenty countries via these two divisions. It has sufficient headroom to grow both organically and via bolt on acquisitions, with attractive margins, especially in the Sensing & Connectivity part of the business. Although the shares are a constituent of the FTSE 250 with a market capitalisation of c. £720 million, this company would still be classified as High Risk so would only be suitable for portfolios with such a mandate. Current price 759p.

Jet2 Plc – Ticker JET2 (Jeremy)

This UK based budget airline operator has a market value of just below £2bn and so falls into the Moderately High-risk category. Although airline capacity currently exceeds demand it is my view that, as inflation falls, demand for holidays will increase and this should particularly benefit budget airlines catering for the package holiday market as households look to affordable breaks.

In September, low-cost airlines accounted for 1.7% more of the total flight numbers than they did during that period pre-Covid. Operating profits for the first half were 42% higher than pre-pandemic levels with rising package holiday margins a key contributor. Jet2 completed a deal last October for 35 new aircraft with the option to extend this to 71 at a “significant discount”, illustrating the company is preparing itself for rising future demand. 65% of fuel costs have been hedged for 2023 along with 55% of £/$ exposure, de-risking the operations and providing more clarity.

At 1045p the shares trade on a multiple of less than 10. A 3p dividend was reinstated at the interim stage and should grow again from here.

A belated Happy New Year to all our readers – here’s to a much brighter 2023.


Russell Dobbs FCSI

Chartered Wealth Manager