Gamble of the week: South Atlantic holdings company

published 20 May 2011

The Falkland Islands' £100m micro-economy has gone into turbo-drive ever since oil explorer Rockhopper released news last September of its chunky offshore discovery called Sea Lion. This has resulted in a mini-boom for Falkland Island Holdings as the associated petro dollars have boosted its local business. Indeed, in April FKL said retail sales had jumped an eye-popping 21% despite increased shipping costs and lower profits from property disposals.

What's more, with Rockhopper finding about 170 million barrels of recoverable liquids, worth in the region of $2bn, FKL's domestic operations should piggyback its recent success for years to come. But that's not all.

There are another four wild-catters also drilling in the region. All have aspirations to strike enormous quantities of black gold. Falklands Oil & Gas (FOGL) is one, in which FKL owns a 8.2% stake worth around £7.5m at 62p per share. Unfortunately, FOGL drew a blank on its first drilling prospect (Toroa), but CEO Tim Bushell is hopeful of finding billions of barrels of hydrocarbons when it starts searching its deepwater Loligo bloc in Q1 2012. Any success in this area, though, should be seen as icing on the cake for FKL

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Falkland Islands Holdings (AIM FKL)

From a valuation perspective, FKL's core interests more than underpin the downtrodden shareprice anyway. House broker Altium is forecasting turnover and underlying earnings per share of £30.6m and 21.1p respectively for the year ending March 2011. The firm also offers a 9p dividend (equivalent to a 2.9% yield). On a sum-of-the-parts basis I would rate FKL's local ferry, property, land bank and retail operations on two times sales. On top of that, its UK-based fine art and antique logistics business Momart is worth around eight times EBITA. Adding all this up and deducting net debt of £2.3m, I get a fair value of over 400p a share. And in the event FOGL strikes oil, FKL's stock could go to the moon.

Granted, there are risks, not least the remote possibility that Argentina reasserts its claims over sovereignty for the region it calls Las Malvinas. Momart may also drag on FKL's results during a recession, albeit this should be more than offset by the influx of oil contractors into its Falklands-based stores.

Preliminary results are due out on 23 June.

Recommendation: BUY at 307.5p (market cap £28m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.