Publishing

For example, I’m keen on illustrated book publisher Quarto (LSE: QRT). The company has UK and US divisions. And with the share price at 157p, its market capitalisation is around £66m.

One thing for me to bear in mind is the company’s president, Chuk Kin Lau, owns just over 50% of the shares. So, he has a controlling interest in the enterprise. But I’m comfortable with that setup.

In March, the company delivered a pleasing set of numbers for the 2021 trading year and an upbeat outlook statement. But, as with all businesses, there is no guarantee of further growth in the current year with all its economic and geopolitical challenges.

Nevertheless, I’m happy to own some of the company’s shares for the years ahead. And I’m looking forward to the half-year results report due on 30 August to learn more about operational progress.

Meanwhile, the price-to-earnings rating is running around seven. And I see that valuation as undemanding. However, the company doesn’t currently pay a shareholder dividend.

Mining services

I’m also holding mining services company Capital (LSE: CAPD). With the share price near 91p, the market capitalisation is around £174m. The business earns its living providing drilling, mining, maintenance, and geochemical laboratory solutions to customers in the minerals industry. And it focuses on the African markets. 

Last week, the company posted a robust set of interim numbers covering the period to 30 June. And looking ahead, the directors raised their revenue guidance for 2022. 

Executive chairman Jamie Boyton said the underlying demand in the market is “encouraging”.  However, he expects some seasonal slowdown through the third quarter. But he pointed to a “buoyant” tender pipeline across drilling, mining, and laboratories as a reason for optimism.

Set against City analysts’ expectations, the forward-looking earnings multiple is just above four for 2023. And the anticipated dividend yield is about 4.3. I see the valuation as attractive despite the cyclical risks inherent in the sector.

Luxury goods

Finally, I decided to take a little slice of Burberry (LSE: BRBY) into my portfolio recently. And my shares sit in my account as part of my diversified long-term portfolio. The company operates as a global luxury goods manufacturer, retailer, and wholesaler. And as with all my recent stock purchases, I’m looking beyond the short-term economic challenges the world faces.

In July, with the first-quarter trading update, the company delivered an encouraging outlook statement. Sales in mainland China had been affected by ongoing lockdowns. But the directors said performance there had been “encouraging” since the company’s stores reopened in June. And the business is targeting high-single-digit percentage revenue growth and 20% margins “in the medium term”.

Meanwhile, City analysts expect earnings to advance by almost 27% in the current trading year to April 2023. And with the share price near 1,777p, the forward-looking earnings multiple is just over 15. There’s also a dividend to collect, yielding around 3%.

However, it’s possible for operational progress to stall and the company may miss its estimates. There isn’t much slack in the valuation to allow for setbacks. Nevertheless, I’m happy to hold my shares for the long haul to see if the company can progress its expansion plans.

Fast-moving consumer goods

Right now, for example, I like the look of smoking products maker Imperial Brands (LSE: IMB). In May, with the half-year report, chief executive Stefan Bomhard was upbeat. He said the company was 18 months through its five-year strategy aimed at creating “consistent” growth. And he is “pleased” with the company’s progress

And now, with the share price near 1,850p, the forward-looking dividend yield is almost 7.8% for the trading year to September 2023. Of course, a company can always miss its estimates. And it’s worth me remembering that tobacco and cigarette volumes are in long-term decline. On top of that, the industry faces intense regulatory scrutiny at times. 

However, Imperial is working hard to develop its business in new generation products that are less harmful to health. And I think the dividend yield is attractive. 

Telecommunications

I also like telecommunications and mobile money services provider Airtel Africa. As the name suggests, the company’s operations are in Africa. In July, the quarterly update trumpeted “double-digit revenue growth, margin and earnings progression, and further strengthening of our balance sheet”.

Chief executive Segun Ogunsanya said the company is targeting growth “ahead of the market” this year. He reckons the business has “attractive” opportunities for sustainable and profitable long-term growth. And that’s because the market is “underpenetrated” for mobile voice, data, and mobile money services.

Earnings appear to be growing by double-digit percentages each year. However, the business was loss-making as recently as 2018. And there’s always the risk that operational challenges could derail the pace of growth in the years ahead.

Nevertheless, City analysts predict some generous hikes in the dividend ahead. And with the share price near 153p, the forward-looking yield for the trading year to March 2024 is a chunky 4.9%.

Mining industry services

Finally, I like mining services company Capital (LSE: CAPD). In July, the company delivered a robust second-quarter trading update. The directors said the business had seen “extremely strong” demand and the outlook is “supportive”.

It’s worth me remembering that Capital serves a cyclical industry. And in any downturn, volumes and profits could plunge. However, there’s no sign of weakness at the moment. City analysts predict a rebound in earnings of around 35% in 2023. And they think the dividend will rise by double-digit percentages this year and next.

Meanwhile, with the share price near 94p, the forward-looking yield for 2023 is just above 5%. I see that as attractive and feel the recovery in the business may have much further to go. I’m prepared to hold on to my Capital shares until well beyond any near-term recession that may affect the world’s economies.

Ready to lift off?

Global air travel is gradually recovering as the pandemic eases. Some areas are further ahead than others — according to jet engine maker Rolls-Royce, domestic flying and private jet activity are already back to 2019 levels. International flying is still well down.

My pick for aviation exposure is chartering specialist Air Partner (LSE: AIR). This business provides a wide range of charter services to governments, companies, and individuals. It also provides aviation training and security.

Air Partner’s share price is still slightly below 2019 levels, but the outlook’s improving. And despite its small size, this business has a much longer and more consistent record of profitability than many airlines.

The main risk I can see is that growth hasn’t been consistent — I wonder if the business will struggle to get much bigger. Even so, this penny stock looks reasonably valued to me, on 13 times forecast earnings. With a useful 3% dividend yield, I’ve been buying the shares for my portfolio.

Profit from gold

My second pick is a company I’ve owned before and probably shouldn’t have sold. Capital (LSE: CAPD) is a mining services company. Formerly known as Capital Drilling, the group provides drilling and other services for some of the biggest gold miners in Africa.

The growth story here’s quite exciting, in my view. Historically, the company just provided drilling rigs for hire. But under chairman Jamie Boyton, who has a 12% shareholding, Capital is expanding to offer other services, such as earth moving. Effectively, the group appears to be moving towards becoming a contract mining company that can operate gold mines on behalf of their owners.

What could go wrong? Capital is having to invest significant amounts in new equipment to win bigger contracts. If the contracts don’t deliver the level of profitability that’s expected, then the group could find itself losing cash fast.

So far, progress seems good. Capital shares are broadly flat on a year ago, but profits are rising steadily. The shares look reasonably valued to me, on less than 10 times earnings. I’m tempted to buy back in.

A penny stock I’m avoiding

One business I’m avoiding today is consumer goods producer McBride (LSE: MCB). This company makes cleaning products, mostly own-branded items for customers such as supermarkets.

Last year saw strong demand, due to Covid-19, but even so the company’s profit margins came under pressure and underlying profits were flat. Things have since taken a turn for the worse. McBride has issued two profit warnings since May. The company says raw material and transport costs are rising, while passing price increases onto its customers is taking time.

These problems highlight a long-term risk with this business — big customers will always put pressure on pricing. McBride’s operating profit margin has always been low, peaking at 4.8% in 2016. Margins have fallen since then.

Despite those two profit warnings, McBride shares are actually up by 33% over the last year. But I don’t expect further gains until the outlook improves. For me, this is a stock that’s not worth the risk right now.

Today I want to explain why I think sellers of this family-owned firm have acted too fast. I also want to take a look at a small-cap mining services firm which I rate as a potential buy.

Copper blues

The price of copper has fallen by about 20% so far this year. That’s not been good news for copper miners. A second concern is the risk of falling demand from China, if the Asian giant’s trade war with the US escalates.

There’s no way of knowing what will happen over the next year or two. But there’s a fairly widespread view among analysts that copper demand is likely to exceed supply from 2020, as demand from renewable energy and electric vehicles surges.

The best way to buy copper

For investors wanting a pure play on copper, I believe Antofagasta could be the best choice. This FTSE 100 firm is generally seen as a high quality, low-cost operator. In 2017, it generated an operating margin of 40% and return on capital employed of 15%. Both are decent figures.

Net cash costs were $1.52/lb during the first half of the year, compared to an average copper sale price of $3.00/lb.

Management has maintained its full-year guidance for net cash costs of $1.35/lb. This should leave plenty of room for profit, even if copper falls below its current level of $2.60/lb.

Antofagasta’s profits are helped by a strong balance sheet. Net debt was just $781m at the end of the half year. That’s just 0.3 times earnings before interest, tax, depreciation and amortisation (EBITDA). Very low indeed.

The shares now trade on 13.5 times forecast earnings, with a well-covered 3.2% dividend yield. I think this could be a rare opportunity to buy this respected miner at an attractive price.

Drilling from east to west

Africa-based drilling contractor Capital Drilling (LSE: CAPD) appears to be betting big on a mining boom in West Africa. The stock’s 9% fall today suggests that not all investors are convinced.

In its half-year results, Capital said that utilisation of its drilling fleet fell from 56% to 46% during the period, because it was busy moving drilling rigs from East to West Africa. Half-year revenue fell by 12.5% to $54.5m, compared to the same period last year.

This commitment to West Africa isn’t without risk. But Capital Drilling is an Africa specialist and has a good record of growth. Having started out in Tanzania in 2005, today the company has a fleet of 94 drilling rigs.

The company also has $3.4m of net cash on the balance sheet, despite the recent mining downturn. Profitability is generally good and operating margins have now returned to double-digits, hitting 10.6% during the first half.

Buy ahead of new growth

Capital Drilling’s management says that there’s a growing level of mining activity in West Africa. It signed three new contracts in the region during the first half and expects rig utilisation to improve during the second half of the year.

After today’s fall, this stock trades on 13 times forecast earnings with a well-supported 4% dividend yield. I believe now could be the right time to buy, ahead of the next stage of growth.

With that in mid, here are two companies which are highly dependent upon the outlook for commodity prices and the wider resources industry. Their valuations and dividend prospects suggest that they could offer investment appeal.

Improving outlook

Reporting on Thursday was drilling solutions company Capital Drilling (LSE: CAPD). The business released a Q1 update which showed a slight decrease in revenue of 1.8% versus the final quarter of 2017. This was in line with expectations, as the company seeks to redeploy idle rigs to high-growth West African markets. Substantial progress was made on this front, with a total of 12 rigs arriving in the region during the period.

The company has been able to maintain a strong balance sheet in recent months, and seems to be well-placed for an anticipated uplift in demand. In fact, it is expected to post a rise in earnings of 34% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 0.4, which suggests that it offers excellent value for money.

Furthermore, Capital Drilling is set to post a rise in dividends per share of around 25% over the next two years. This puts it on a forward dividend yield of almost 4%, and suggests that it could become an attractive income share. Certainly, it may offer less stability than many income stocks in other sectors, but with dividend payments set to be covered twice by profit, it could prove to be a sustainable level of payout.

High returns

Also offering strong income prospects within a similar space is Rio Tinto (LSE: RIO). The FTSE 100 company has enjoyed a more positive period over recent months, with demand for iron ore being relatively buoyant after a challenging period. This has helped the company to deliver two consecutive years of bottom-line growth, which is set to have a positive impact on its dividend payments.

At the present time, the company has a dividend yield of around 5.5%. Clearly, this is likely to fluctuate depending on commodity prices and how profitable the business will be in future years. But with the stock having what appears to be a solid balance sheet and strong cash flow, it could be a strong performer over the coming years.

Furthermore, Rio Tinto trades on a price-to-earnings (P/E) ratio of 13. Given its competitive advantage in terms of a low cost base relative to sector peers and its high-quality asset base, this could prove to be a low price to pay. As such, from an income investing and growth perspective, the company’s shares appear to be worth buying now for the long term.

The stock’s dramatic decline has been caused by a run of flow test results which have disappointed the market. In December the group declared that a zone of Broadford Bridge-1 (BB-1) well was “likely not economically viable” after a flow test which produced only “traces” of oil.

More recently, flow testing a different section of BB-1 produced just 10-72 barrels of fluid per day over a 96-hour test period. The proportion of oil recovered rose to more than 30% during the tests. However, my view is that the short duration of the test and the low and inconsistent volumes of fluid aren’t encouraging.

There’s still hope

The company is now suggesting that parts of BB-1 may be blocked. A sidetrack well may need to be drilled so that the target intervals can be successfully tested. This may be the case, but the firm has already resorted to costly ‘death spiral financing’. Further fundraising could be difficult, in my view.

UK Oil & Gas may yet deliver results for patient investors. But the drilling results so far have been poor, or at best inconclusive. Holding on to this stock seems very risky to me. I’d sell, as the share price could still have further to fall.

One small-cap I’d buy

My second stock today sees us look at a different kind of drilling operation. Shares of Africa-focused mining drill rig contractor Capital Drilling (LSE: CAPD) were up by 8% at noon on Friday, after the firm reported a return to profit in 2017.

After commodity prices recover, as we saw in 2016, there is usually a further lag before new contracts start to be awarded. However, the firm reported eight new contracts in 2017 and now seems to be seeing the benefits of stronger market conditions.

Fleet size was almost unchanged last year, but fleet utilisation rose from 45% to 53%. Rates improved too, as the average revenue per operating rig rose by 10% to $194,000.

Revenue rose by 28% to $119.4m and the group moved back into the black with an operating profit of $11.7m. Earnings of 3.9 cents per share were in line with broker forecasts and shareholders will receive a total dividend for the year of 1.7 cents, giving a yield of about 3.1%.

There could be more to come

I believe this could be a good investment as the mining sector returns to growth. Capital Drilling reported a return on capital employed of 14% for 2017 and said that net cash rose from $0.6m to $4.9m. I expect cash generation to remain strong and support further dividend growth.

The only obvious risk is that some of the company’s main contracts are with gold mining firms in Tanzania. Some of these miners are currently engaged in a dispute with the country’s government. An unfavourable outcome could restrict future activity.

Despite this risk, I’d still be happy to consider Capital Drilling at under 40p per share. Although the forward price/earnings multiple of 17 may look pricey, I believe the group’s recovery is likely to have further to go.

Driller killer

Capital Drilling (LSE: CAPD), which provides drilling teams and equipment to mining operations in emerging and developing markets, has plunged since its shares peaked at 66p in January. Today, it trades at just 40p. I reckon this could be a buying opportunity because despite recent slippage the company’s results have been heading in the right direction this year.

Investors were cheered by news in February that Capital Drilling had cut its after-tax net loss from $10.2m to $4.8m, with revenues rising 19% to $93.4m. Last month, its half-year trading update trailed a substantial 49% year-on-year rise in revenues to $62.3m, marking its strongest first half since 2013. However, that hasn’t stop the share price from trailing away in recent weeks.

Capital return

Capital Drilling, which has a market cap of £52.07m, published half-year results for the period to 30 June this morning, with the positive news that it has now swung back into profit. This was primarily driven by a 40% increase in fleet utilisation rates to 56% year-on-year, with the average revenue per operating rig jumping from $175,000 to $191,000. Revenues bounced 49.04% from $41.7m to $62.3m, while EBITDA was up 59% to $11.6m. Net profit after tax was $2.6m against a loss of $0.8m last time.

Executive chairman Jamie Boyton hailed its improved fleet utilisation rate, revenue and profit growth, which he said were underpinned by improved market conditions: “While the initial uplift in activity was associated with predominantly gold and speciality metals companies, this has broadened over H1 2017 with an improving outlook in industrial metals, particularly copper.” 

Gold mining

Boyton said that capital markets continue to underpin junior miners and explorers, supporting increased exploration and development expenditure, while the company was boosted by two new long-term contract wins at the Tasiast Mine in Mauritania and the Syama Mine in Mali. 

However, he warned that legislative changes in Tanzania are causing concern and uncertainty, which may impact exploration and investment in the country “for the foreseeable future.” Although this is consistent with previous guidance, this may explain the lukewarm market response to today’s otherwise upbeat results.

Cash flows

The share price is down 2.53% at time of writing, as the results fail to revive recent waning investor enthusiasm so far. However, I can see plenty of positives to dig into, with Boyton reporting the firm in excellent financial health and generating solid free cash flow. “This strong cash generation, coupled with enhanced discipline around capital expenditure, has seen the Group end the period with net cash of $3.3m,” he said.

Capital Drilling has declared an interim dividend of 0.5 cents per share for the first half, up from 1.5 cents last year. This is a small company in a risky area, but with City analysts forecasting a 19% rise in earnings per share in 2018 this falling knife looks tempting.

Rising broker upgrades are a useful way to identify a company that might have strong momentum. Today, I’m going to focus on two companies which have both enjoyed major earnings upgrades over the last few months.

This turnaround is gathering pace

Last year saw a spectacular recovery among big mining stocks. Technical contractors such as Capital Drilling Ltd (LSE: CAPD) also did very well — the group’s shares tripled last year. However, since February, the shares have fallen by 30% from 63p to just 44p. I believe this could be a buying opportunity.

In a trading update this morning, Capital Drilling reported first-half revenue of $62.3m. That’s 49% higher than during the same period last year, and the highest H1 figure since 2013, when the mining downturn started.

Utilisation of the company’s fleet of drilling rigs rose to 56% during the first half, up from 40% during the same period last year. The average revenue from each operating rig rose from $175,000 to $191,000, as customer activity levels improved.

Today’s figures suggest to me that the business is starting to see the benefits of a genuine upturn in the mining cycle. The firm’s customers are starting to spend more on development and exploration, laying the foundations for fresh growth.

Mining analysts expect Capital’s turnaround to continue in 2018, with earnings expected to double to 6 cents per share. This forecast has risen by 15% over the last three months. I wouldn’t be surprised to see a further round of upgrades. Now could be a good time to take a closer look.

Approaching a peak?

Until a few years ago, Burford Capital Limited (LSE: BUR) was a small-cap stock operating in the niche area of litigation financing. It’s now a £1.9bn company.

Burford’s earnings per share have risen by an average of 44% per year since 2011. The firm’s shares have risen by a staggering 745% over the last five years, making this a very profitable buy for long-term shareholders.

2017 is likely to be another successful year. Earnings forecasts of $0.60 per share were recently increased to $0.88 per share, following an increase in the implied value of one of the group’s biggest cases.

If the company does manage to hit forecasts this year, then earnings per share will rise by 66%.

But it’s worth noting that the same analysts who expect profits to rise this year believe that they will fall in 2018. The latest consensus forecasts suggest that the group’s earnings will fall by 19% next year.

The question for shareholders is whether this is a short-term blip, or a sign that Burford’s growth may be reaching a peak. As things stand, the stock doesn’t look especially expensive, on a 2018 forecast P/E of 16.5.

However, if the company’s is forced to reduce its earnings guidance for any reason, the shares could fall sharply. If I happened to be a Burford shareholder, I’d probably continue to hold. But I wouldn’t buy any more at current levels.