As I pointed out in my , there's treasure to be found in penny shares. So here, I'll let you in on five companies where 'X' definitely marks the spot. But the seas are full of dangers too, so there's another five you need to throw overboard.
SHIPS TO BOARD
Western & Oriental
Pirates were, of course, the first to spot the attractions of sandy beaches and secret coves. Apart from giving a potentially mutinous crew time off to get drunk, ships had to be regularly cleaned and repaired; it was also the most dangerous time because you were defenceless against attack. Some 400 years on, sandy beaches and secret coves are big tourist attractions. So my first recommendation is up-market travel agent Western & Oriental, which has been busy buying up premier-class travel businesses. It has built up a company that can cope with £200m of annual sales, but pro-forma sales in the 12 months to end-September 2007 were just £56m. Its holidays cost an average of £3,000 so you are much more likely to find its customers in Bali than in Benidorm and in Fiji rather than Folkestone. Broker Collins Stewart has forecast current-year sales of £65m and profits of £1.3m, rising to £70.1m and £2.7m in the following year. And the share price seems to be consolidating at long last after a steep fall.
Fidelity Systems
Last summer I sailed up the Humber and was amazed to see families awash in their homes. We docked with difficulty and I sent a team of stroppy sailors off to raid Fidelity Systems, which I reckon is one of the most underdeveloped shares on Plus Markets (formerly Ofex). True, the share price spread is quite wide, but Fidelity has been winning lots of orders for its back-office electronic point-of-sale (Epos) control and reporting software. It supplies 50 universities with its bar Epos software. It also supplies 54 Yorkshire pharmacies with similar software and has moved into radio frequency identification. Fidelity has also been helped by some rivals bowing out. First half results to end-August 2007 showed sales up from £595,000 to £816,000 and rising margins as profits advanced from £48,000 to £190,000.
Leyshon Resources
Now it's time to set sail for foreign waters and find big booty. Pirates sailed long distances and I am off to China to investigate claims of El Dorado gold mines. China is, or is about to become, the world's number one gold producer and has lots of attractions for pirates. Unlike South Africa, which is facing power cuts, Russia where you could be robbed of any half-decent discovery or Canada and Australia, where long distances can make mining expensive, China looks like a good bet. Leyshon Resources' 70:30 joint venture close to the Russian border is particularly attractive. There, the infrastructure is good and material, wage and power costs are low (as the area has a surplus of power). So gold extraction costs are expected to be under $250 an ounce (oz). At today's gold price, that's a tasty margin for any buccaneer and the royalty payable is just 2 per cent. Last month, Leyshon reported encouraging 'final' infill drill results consistent with previous drilling. Not only that, but with a mining licence due this year, Leyshon could be operating an open-pit mine in 2009. Broker Ambrian - which highlights the shares one of its top picks in 2008 - believes that output could be quickly ramped up to 100,000 oz of gold and 200,000 oz of silver a year. Nor is Leyshon finding it difficult to raise the $50m (£25.7m) needed to construct a mining operation - it has been bombarded with offers of finance.
Weatherly International
On my way home from China, we land in Namibia, a forlorn place. But not so forlorn for a pirate with a nose for undervalued mining plays. And here, deep in the interior, sits little-known Weatherly International. In July 2006, it bought a failing Namibian copper mining and smelting company for $35.1m. It has spent a further $44m rehabilitating four existing mines and has also commissioned a fifth. Three of these are now in production and the other two should be soon. In the year to end-June 2007, it produced just under 6,000 tonnes of copper and reported a $6.29m profit before gains on the sale of uranium and limestone interests. This year, researcher Equity Growth expects copper production of 15,000 tonnes (although electricity outages will knock that figure back a little) and 26,000 tonnes in 2010-11. A radical upgrading of its smelter could double capacity to 50,000 tonnes per year in 12 months' time and cut costs by around half. Weatherly has also signed an initial three-year contract to process Peruvian copper concentrate. Its smelter is one of only a few that can process concentrates with a high arsenic content. It seems that I'm not the only privateer to have located this potential treasure chest; the company has just revealed it's in bid talks, pushing its value up by 30 per cent.
Impax Group: Green Buy
Pirates were among the first green investors, sailing ships that left no carbon footprint. Although, of course, there were occasional issues with human rights. My target now is Impax Group because of all the doubloons it's accumulating by taking on investment mandates from far and wide (including even land-locked Luxembourg) to manage green funds. I had thought that green was an excuse for poor performance, but the wind is turning and there's lots of gold to be made in terms of fees for running green funds. And what Impax has are lots of coffers full of gold - it has a green investment trust and white-labelled products for keen institutional investors. It is also set to launch retail investments for the discerning navvy. Its latest results were excellent - I wish I could garner as much gold with as little physical effort.
SHIPS TO AVOID
It's also important - indeed vital - to know when to avoid ships that may have big problems under the poop deck. It's not rocket science that a low share price is low because of problems, but a pirate needs to know what those problems are and how quickly they can be overcome - if indeed they can be overcome. The big dangers at the moment are small UK domestic companies facing the rocks of recession, without hope of selling overseas. They are on the binnacle list with good reason. Here are five shares to avoid:
Wren Homes
Wren Homes is a sound second-division housebuilder with a sensible strategy. What it does is buy up and demolish houses with big gardens in Surrey and builds a sizeable number of retirement homes in their place. That's good business when the UK population is ageing, but not so good when confidence in the housing market has dropped to a 16-year low. Falling house prices reduce the number of house deals and Wren's boast of a 70 per cent success rate in obtaining planning permission for its sites means little in such circumstances.
Stonemartin
Equally gloomy is the news from commercial property. The credit crunch has put the dampeners on property companies gearing up - not only that, but a mass exit from retail funds means that some of those funds will have to sell property in an extremely weak market. But however bad the woes of straightforward commercial property investors and developers are, the news from Stonemartin is even worse. It, too, had a good idea and, back in 2001, teamed up with two pukka institutions (Norwich Union and BT's fund manager, Hermes). The two institutions were to buy suitable city-centre buildings, which Stonemartin could then turn into services offices. It would manage them and share the profits with the institutions. All went well for more than five years and, some 18 months ago, Stonemartin was managing five such offices and hoped to acquire five more. Then, last summer, Norwich Union and Hermes told Stonemartin that they wanted to sell the serviced offices in Bristol and that the others may go too. Stonemartin earns income during a notice period and has some cash, but its future as anything other than a cash shell seems bleak.
Pubs n Bars
And at a time of recession and squeezed personal spending, boarding a second-league pub chain does not seem a good idea to me. The smoking ban has knocked sales and there's an enormous difference between the price of beer in a pub and in a supermarket. We said sell Pubs n Bars' shares in October at 41p and we continue to take a cautious view of the company. It was, however, able to place shares at 29p in December to acquire 10 more freehold pubs in Hertfordshire and Oxfordshire.
HC Slingsby
Another sell recommendation last year - and one that also remains in place at a lower price - is industrial products supplier HC Slingsby. It sells more than 35,000 different products, with recent offers including a plastic salt and grit bin at just over £112 and a mailroom trolley for £240. But recession means less orders from its many small and medium-sized customers who need to cut spending to survive.
Top Ten
As recession looms in the UK, my last target for Davy Jones's locker must be bingo hall operator Top Ten. There's no doubt that the bingo industry needs help following last year's smoking ban. Instead, it has been abandoned by the British government. Bingo operators have to pay VAT on score cards and a gross profit tax of 15 per cent on turnover less prizes. No other gambling organisation pays both charges. Not fair Mr Darling - time for a flogging. Although Top Ten has the asset backing to keep going, the view is not good from the crow's nest. I reckon it will be holed by poor results for some time to come. Top Ten is a vessel to avoid.
