One to watch: Kingfisher set to fly

KINGFISHER is Europe's leading home improvement retail group and the third largest in the world, with almost 830 stores in eight countries in Europe and Asia. Its main retail brands are B&Q, Castorama, Brico Dpt and Screwfix.

The shares have performed poorly of late as worries over tightening consumer spending weigh on investors' minds. What should not be overlooked, however, is the cash generation the company is able to achieve.

In January 2009, net debt was 999 million but this figure is expected to have dramatically decreased to under 300m when the company next reports. By January 2012, Kingfisher should be debt free, giving management the freedom to instigate a share buyback programme, increase dividends markedly or re-invest in the business.

Earnings have recovered much faster than analysts were expecting and the past few years have demonstrated Kingfisher is a business with high operational leverage. In addition to rapidly improving earnings, Kingfisher has a substantial amount of freehold property, which equates to about 145p of its share price. This should help provide a floor to the shares if market nervousness continues.

Kingfisher should materially increase its dividend this coming year and thereafter. On consensus numbers, the company will be yielding 3.1 per cent January 2010E, rising to 4 per cent 2011E. On a valuation basis, Kingfisher is trading on a P/E of 10x 2011E, falling to 8.4x 2012E, hardly demanding for a company with global reach.

If you are nervous about the UK consumer sector, Kingfisher gives you the opportunity to invest in a company with overseas earnings, backed by assets that will benefit from a weak pound.

The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

Dana Petroleum

1,036p +28p

Broker says BUY

FOLLOWING Dana Petroleum making a second gas discovery in Egypt, Citi has reiterated its "Buy" rating on the Edinburgh-based oil and gas explorer.

Citi added: "Dana remains our deep value play in the sector. This positive drilling results offshore Egypt should help turn sentiment to Dana."

Smith & Nephew

660p +27p

Broker says BUY

CHARLES Stanley has upgraded Smith & Nephew from "Hold" to "Buy" following "a strong fourth-quarter performance".

The broker said: "While we have been cautious regarding the shares in view of the company's volatile history, it does appear as if the problems have been consigned to the past."