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There is barely a story in the market at the moment that doesn’t have something to do with China.
China keeps global inflation down (by flooding the world with cheap products). China keeps global interest rates low (by keeping inflation low). And, of course, China is driving the bull market in commodities. As it ramps up its industrial production, the rapidly industrialising giant needs metals and it needs fuel. And for China, fuel very often means coal.
China’s coal consumption has doubled in the last three years, while its own supplies are running low. American demand is up too, pushed higher by security worries over Middle Eastern oil. But we aren’t sure we’d invest in pure coal miners right now – they’ve all seen their shares soar already. Instead, it might be worth looking at the firms that make the kit the miners need to keep mining.
One of these is Fenner (FENR, tipped at 155p by The Daily Telegraph), says Questor in The Daily Telegraph. It might be difficult to “make its industrial conveyor belts and seals sound sexy”, but the thought of “continued three-year, three-fold growth” should get any investor sitting up and taking notice.
Fenner sells 60% of its conveyor belts to US coal miners, who are upping production as increasing numbers of power plants, crippled by high oil prices and supply crunches, switch to coal as an alternative. Fenner is also well placed to sell more belts and seals to China, South Africa and India, as demand increases in these countries.
Fenner has also been cutting costs (something the miners themselves can’t do at the moment) and bumping up its margins as a result. In addition, its high margin specialisation in seals, and a successful integration of a seal business acquisition, are highly encouraging. On a forward p/e of 13 times – implying a price/earnings to growth ratio of just 0.7 (based on forecasts that earnings will grow at 21% in 2006) – the firm looks “reasonably cheap. Buy.”
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Annunziata Rees-Mogg
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