Companies: FKL ��

Originally created under Royal Charter in 1852 and former owner of two-thirds of the sheep pastures in the UK’s South Atlantic Overseas Territory, Falkland Islands Holdings (FIH) is a very different beast today. It has a stake in local oil and gas exploration, which, if successful, could transform the company and dwarf all its other interests, as well as owning the profitable Portsmouth Harbour Ferry and leading UK fine art and antiques handler Momart, bought recently in a �10.27 million shares-and-cash deal.

From the AIM-quoted company’s headquarters in Bishop’s Stortford, chairman David Hudd and managing director John Foster are waiting to see what value its �4.2 million investment in fellow AIM counter Falkland Oil & Gas (FOGL) will command after drilling starts next year off the south and east coasts of the islands. FIH, which is currently converting the Upland Goose hostelry of Falklands War fame into residential housing, holds 16.3 per cent of FOGL, whose licences cover more than 48,853 sq km of the south Atlantic, equivalent to 220 North Sea blocks.

Analysts at house broker KBC Peel Hunt put the present value of the company’s FOGL stake at �19.5 million, already more than half FIH’s present AIM value of �36.5 million, and there would be no capital gains tax liability on the holding, which is kept in the Falklands. Bullish estimates now put FOGL’s potential resources at more than three billion barrels.

If the eventual figure emerges at anything like that, it would utterly transform FIH – whatever discount is applied for production costs in a remote and technically inhospitable environment and the political risk of claims on the resource from neighbouring Argentina (a risk neutralised, Hudd argues, by the presence on the Falklands of a permanent British garrison).

There is, of course, a risk that the deposits could prove disappointing or uneconomic, as happened with the mineral prospects probed by yet another AIM concern, Falkland Gold and Minerals, in which FIH sold its own 14 per cent stake last year for a �485,000 profit.

The fact that FOGL’s partner, committed to paying 68 per cent of the drilling and development costs, is BHP Billiton, the giant Anglo-Australian mining and resources group, provides some reassurance, but nothing can be guaranteed. FIH has continued to diversify in the UK, despite profitable Falklands interests such as supplying Land Rovers to the islanders and the military, support services for booming squid fishing, 60 per cent of the local retail trade and the only insurance broker for a community whose gross national product per head is now claimed to be 25 per cent above the UK’s.
FIH owns Portsmouth Harbour Ferry Company, which makes 3.7 million passenger journeys a year between Gosport and Portsmouth Harbour. Proposals for a multi-million pound road tunnel have been thwarted and it provides steady cash.

Late last year, FIH had �5 million cash and asked nominated adviser Dawnay Day to find a possible acquisition. The result was the purchase of Momart, which provides high-quality, rather than express, handling services for clients including the National Gallery, the V&A, Tate, the British Museum, the Royal Collection, UBS and Damien Hirst, and made �1.2 million pre-tax profit in the year to last August.

FIH is paying up to �7.78 million of the �10.27 million purchase price in cash between now and 2010, partly funded with a �4 million bank loan, with the rest in shares (subject to a 12-month lock in). The deal obliges FIH to retain some Momart directors and keep to some non-competition covenants.

Hudd and Foster say the Momart deal will ‘double profitability for a seven per cent equity dilution’. They see FIH as likely to benefit from outsourcing and consolidation trends in a global art and antiques market.

FIH increased underlying pre-tax profits 12 per cent to �1.7 million in the year to March 2007 on turnover 2.7 per cent ahead at �15.6 million, although, taking into account share sale gains and other exceptional items, profits fell from �3 million to �1.8 million.
Interim profits rose 25 per cent to nearly �800,000 and, with �3 million cash and �6 million borrowings (and eightfold interest cover), the company faces a modestly growing profits outlook, say analysts. That’s unless, crucially, FOGL comes up trumps, and Momart could liven things up too if the right deal comes along.