With drilling scheduled to start imminently on one of the most exciting oil prospects in the Falkland Islands, a steady support services conglomerate that is celebrating its 160th anniversary, Falkland Island Holdings, looks like an interesting play for investors who want a low-risk gamble with the potential for huge returns. Throw in an excellent dividend record, and shares in Falkland are the ideal way to play the black gold rush on the South Atlantic islands.
- Share price could double in a matter of months
- Strong trading in core business
- Downside limited to 20 per cent
- Solid dividend track record
- Falklands oil has a history of disappointment
- The 'Malvinas' issue never far away
Oil and gas exploration in the Falkland Islands has always been a risky prospect due to the isolation of the location and the perilous drilling depths. Up until now, the story has been more damp squib than bonanza, with a lot of expensive muddy holes and only the Sea Lion discovery looking viable. But that's partly why Falkland's shares offer such a good opportunity. They come with an ultra-safe dividend, which currently yields 3.2 per cent, while shareholders wait patiently for a gusher. What's more, the waiting could soon be over.
Falkland Island Holdings has a 4.4 per cent stake in Falkland Oil & Gas (FOGL). That may not sound like much, but the size of the potential discoveries in the waters off the Falkland Islands make it mouthwatering. FOGL is due to start drilling on two prospects in the East Falklands called Loligo and Scotia, where there are estimates of 4.7bn and 1.1bn barrels of oil equivalent respectively. Analysts at broker Merchant Securities think these prospects are substantially larger than elsewhere in the Falkland Islands and success at both wells will make FOGL worth 2,488p a share, 26 times its current level. That would make Falkland's interest worth £350m or 3,768p a share. Exploration is a tricky business, though, and Merchant's analysts put the chances of success at 21 per cent for Loligo and 17 per cent for Scotia. That reduces the possible value of Falkand's interests to 606p, still approaching twice the current share price.
FALKLAND ISLAND HOLDINGS (FKL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 365p | MARKET VALUE: | £34m | |
| TOUCH: | 350-365p | 12M HIGH: | 418p | LOW: 225p |
| DIVIDEND YIELD: | 3.2% | PE RATIO: | 14 | |
| NET ASSET VALUE: | 317p | NET DEBT: | 19% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 32.3 | -0.63 | -12.8 | 8.0 |
| 2010 | 29.2 | 5.67 | 58.2 | 9.0 |
| 2011 | 31.8 | 2.33 | 17.7 | 9.5 |
| 2012 | 34.1 | 2.84 | 24.5 | 11.0 |
| 2013* | 35.4 | 3.20 | 25.8 | 11.6 |
| % change | +4 | - | - | +5 |
Normal market size: 500 Market makers: 7 Beta: 0.6 *WH Ireland forecasts (profits and earnings not comparable with historic figures) | ||||
Besides, remove the FOGL holding - valued at £13.6m or 96p a share - from the balance sheet and that still leaves 226p a share in net assets, and analysts at broker WH Ireland reckon those assets are really worth 372p.
That's because Falkland has some solid operations. Results for 2011-12 beat analysts' expectations, with a steady performance from the core retail business on the islands, despite poor weather and the continual effect of the 'Malvinas factor' that deters tourists from taking a cruise route via the Falklands. In the UK, the Portsmouth ferry operation was resilient. The star showing came from the Momart fine art logistics business, which benefited from the booming global art market to report a 81 per cent increase in underlying profits.
