Fish oil producer could put investors in clover

ROB Millner's Washington H. Soul Pattinson has performed outstandingly in recent years, including the emergence of micro cap Clover Corp. Clover operates in the growing nutraceutical market, concentrating on the production and delivery of natural fish oils into food products such as baby formula and bread. In the developing world the overall market for infant formula is growing at 12 per cent a year.

Clover has grown its revenue and earnings at 20 per cent a year while preserving a cash-rich balance sheet and paying dividends. This approach is unlikely to change in the foreseeable future since Washington H. Soul Pattinson owns 28 per cent of the stock.

The company earned $2.6 million net profit for the six months to January 31 and said it was confident the second half would be strong. Assuming the company doubles the first-half result, that puts it on a P/E ratio of 10 times for 2012 once the cash is backed out.

If the company can grow at 20 per cent over the next two years, this P/E looks skinny. All going well, shareholders could benefit from the double whammy of earnings growth and P/E expansion.

SILEX SYSTEMS (SLX)

SILEX is one of those rare stocks that has made many investors wealthy and many investors wish they never looked at the sharemarket. The stock peaked in mid-2007, hitting $13.50 a share before tripping and falling all the way back to $1.80 in December 2011. However, in the past five months the stock has been sizzling, rising to $3.78, a gain of 110 per cent. This has taken place despite the closure of uranium reactors in Japan following the March 2011 tsunami.

Silex's main business is a new method of uranium enrichment. Some years ago it entered an agreement to commercialise the technology with a consortium named NRC that includes General Electric, Hitachi and Canadian group Cameco Corp. NRC is working on a pilot plant in the US and, all going well, the board will give the all-clear to begin a full-size commercial plant about September. Silex will receive a royalty of 7 per cent to 12 per cent on any sales. The technology uses lasers and allows uranium operators to save costs by building smaller plants and using less energy.

If NRC gives the green light to commercialise the technology then the consortium could grab a large slice of the uranium enrichment market in the US that is estimated to be $7 billion, growing to $20 billion in 2030. If NRC can get 20 per cent of the market and pay a royalty of 8 per cent to Silex, then revenue will go from $112 million to $320 million by 2030. It has been a long time coming, so tread with caution.

ALESCO (ALS)

WHAT are the chances of investors buying shares in takeover target Alesco at $2.10 a share and still making a decent return? Dulux's decision to purchase 19 per cent of Alesco's shares before making a $2 bid virtually guarantees the takeover will take place. Investors have to ask if they can make a reasonable return with Alesco trading 10? above the bid price.

Unless a competitive bid is forthcoming, the best Alesco and its shareholders can hope for is a 25? increase in the offer. This will allow Dulux to tell its irritated shareholders the acquisition is highly accretive through the housing cycle. Such a scenario would mean buyers of Alesco today would book a gain of about 7 per cent over the next four months.

Former fund manager Matthew Kidman is director of WAM Capital. The Age accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.