It’s just like playing roulette in Vegas with certain stocks. There has not been any official release over the last few days on IGas Energy (LSE: IGAS) and Benchmark Holdings (LSE: BMK), yet their shares were up over 10% in early trade today. Both gave up up some of their gains before midday, but the pressing question for me is whether they still represent good value for money right now.
Here’s my quick take.
Benchmark Trades High — Too High?
The shares of Benchmark are gaining strength after a poor performance earlier this year, when its stock plunged 30% on the back of disappointing sales figures for Salmosan Vet, a flagship sea lice treatment that is off-patent.
Benchmark is an health science business that has star investor Neil Woodford on its shareholder register: it is a more obvious investment than IGas based on the sector’s trends, growth rates, financing needs and a few other elements.
Reports over the weekend suggested that the group — which is growing by acquiring assets, most recently in the aquaculture genetics and breeding sector — is well positioned to launch new products, but in spite of that it remains unlikely to be profitable for some time.
“Benchmark is pioneering vaccines for animals as an alternative and the group is also at the forefront of biotechnology in the animal sector,” Thisismoney.co.uk reported on Saturday.
“One of its most advanced products is HypoCat, designed to treat human allergic reactions to cats by vaccinating cats rather than the people affected by them.”
Its stock has been on a roll since 27 July, when it announced a couple of bolt-on, cash-funded acquisitions for £11m. It traded at 62p before then, which yields a 40% performance in less than three weeks, and means that the market is now convinced that its strategy could pay off.
I’d certainly keep an eye on it with the idea of investing part of my savings in its shares sooner rather than later. Consider that at its current price of 88p a share, its valuation is only about 15p above IPO — which was priced in December 2013 — and well below its 52-week high of 125p, but it is almost prohibitive based on revenues and cash flow multiples. That said, if you’re happy to embrace risk by betting on its healthy pipeline of products, you should snap up its stock right now.
It is A Balancing Act For IGas Energy
IGas stock is rising from a very low level — in spite of today’s performance, it is still down 70% over the last 12 months!
Management has the backing of the UK government, but fracking doesn’t have the backing of local communities. This might not be an insurmountable hurdle over the very long term, but it renders IGas Energy’s mission particularly difficult and comes on top of obvious financial constraints, given that its balance sheet carries a significant debt load.
“The government continues in its attempts to break down the barriers to allow companies to frack in the UK after the Minister of State for Energy and Climate Change Andrea Leadsom visited IGas Energy’s proposed site in Warrington, Cheshire, on Thursday,” Alliance News reported on Friday.
Operationally, IGas is faced with obvious regulatory risks. Consider that Cuadrilla Resources, a rather small shale gas company based in Staffordshire, recently said that it planned to appeal against the Lancashire County Council’s decision to reject two of its planning permits. Why?
Hydraulic fracking isn’t loved very much by the locals as it brings “noise and visual impacts“, and here is where the investment in IGas and any other rivals becomes particularly risky.
In fact, although it’s possible that IGas may find a way to get around most of these issues over time, it’s also very likely that many of its projects will have to face significant delays, which renders vain any attempt to model its cash flows accurately. This is also a threat to its business model.
Elsewhere, its partnership with Switzerland’s Ineos is one element I like, but its financials are stretched, which signals dilution risk.
So, personally I’d avoid this highly speculative trade, whose value is down 30% since the turn of the year.
