Investment Column: Kingfisher takes wing as B&Q China soars

Our view: Buy

Share price: 225.3p (+1.8p)

The second quarter was a mixed bag at Kingfisher, the owner of the DIY chain B&Q. The world's third-largest DIY retailer touted strong underlying sales in France and China, but trade fell in the UK and Poland. On these shores, like-for-like sales dropped by 4.3 per cent in the 10 weeks to 10 July, as UK and Irish consumers avoided splashing out on big-ticket items such as kitchens, bathrooms and bedrooms.

The fall in sales at stores that have been open for more than a year also reflected fewer promotions, as B&Q resisted the temptation to slash prices during the period spanning the election, the World Cup and the recent hot weather, which will have decreased footfall.

But less promotional activity actually helped B&Q to achieve higher gross profits in the quarter. There was similar good news about margins in France, where Kingfisher's Brico Depot and Castorama chains account for almost half of its retail profits. This robust performance either side of the Channel bodes well for Kingfisher's full-year pre-tax profits for 2011, which the consensus City forecast has at £639m, compared with £547m last year. Furthermore, Kingfisher's business in China, where it has had its fair share of troubles recently, seems to have turned a corner. B&Q China's underlying sales increased by 8.2 per cent, reflecting its turnaround programme and a rise in housing activity in most regions.

Although the 2011 multiple of 11.8 times forecast earnings represents a slight premium to the sector, many City analysts think this is justified by its global reach, its potential to improve its gross margins through group sourcing, for example, and its enviably strong balance sheet.

Despite Kingfisher facing a tough consumer environment in the UK and in other countries this year, we tend to agree that its share price is set to rise – albeit modestly – so buy.

Petropavlovsk

Our view: Buy

Share price: 1106p (+9p)

Petropavlovsk has been something of a gold mine for investors. Shares in the Russian company, which used to be known as Peter Hambro Mining, have soared as gold has hit the heady heights of $1,200 an ounce, helped on its way by investors' nervousness about other asset classes.

Petropavlovsk shares tend to ebb and flow with the value of the shiny stuff, which is hardly surprising given that it is primarily a gold producer. And as investors have rediscovered their nerve over the last month or so, the price of gold has fallen and so has the miner's share price. But we think Petropavlovsk is more than simply a proxy for the gold price. The company is set to list its iron ore business on the Hong Kong stock exchange in the coming months and, with analysts arguing that demand from steel producers in neighbouring China will continue to be strong, we reckon that the market is not recognising this value in the company.

There was disappointing news yesterday, when Petropavlovsk said it predicted that its full-year gold output would be at the lower end of previous guidance, and that its first-half output fell by 26 per cent. All in all, this would not worry us unduly: the company trades on an undemanding rating of just 16.6 times forecast full-year earnings, which falls to 10.9 times in 2011. Even though the dividend yield is a pretty tepid 1.2 per cent, we think the recent sell-off is unjustified, so buy.

RPC

Our view: Buy

Share price: 259p (+5.5p)

The plastic packaging supplier RPC cheered investors recently with a trading statement that showed its revenues, sales and prices were all up. Raw material prices remain a concern but less than you might think, given that RPC has pass-through clauses in most of its contracts, so higher prices will feed through to customers, albeit with a time lag.

Profits are in line with management's hopes and investors should note that the business is underpinned by a strong balance sheet, with RPC benefiting from "significant headroom" under its financing facilities, most of which are in place until 2012. This means that whatever the banks do, RPC should stay on a firm footing.

And yet, it trades on a multiple of just 8.7 times forecast earnings for 2011, according to Collins Stewart – a figure predicted to fall below 8 in 2012. At the same time, the forecast yield goes from 4.5 per cent for 2011 to nearly 5 per cent for 2012. RPC is either as cheap as (plastic) chips or there's a sting in the tail they're not telling us about. We don't see where that is, and would buy now because, at this price, the shares should go only one way.