ABF needs beefing up with a buy

The Investment Column

Interest in Associated British Foods was ignited last month when it unloaded its Irish supermarket chains on Tesco for pounds 630m.

The proceeds mean ABF is set to end the year with a cash mountain of some pounds 1.5bn, which it indicated could be geared up to give a war chest of twice that sum.

It is six years since executive chairman Garry Weston spent pounds 880m buying British Sugar, but he is clearly indicating that he is in the mood for another big acquisition.

Already big in businesses making use of basic agricultural products - wheat, sugar, edible oils, speciality fats and the like - Mr Weston says he wants something which adds value up the chain without getting too close to the cutthroat competition from supermarkets. He freely admits that the speciality chemicals businesses recently put up for sale by Unilever would fit the bill perfectly.

National Starch, for instance, a world leader in many of its areas of speciality chemicals, food ingredients, adhesives and resins would probably carry a price tag of around pounds 3bn.

National's profits, put at around pounds 250m for last year, would transform the group. But with bids having gone in last week, competition will be intense and Mr Weston has not made his reputation by overpaying.

Meanwhile, the trends in the existing business have been deeply uninspiring in the latest six months to March. Pre-tax profits crept ahead pounds 3m to pounds 201m, and even adding back the pounds 11m hit from currency, the underlying growth of 8 per cent was hardly exciting.

British Sugar took a pounds 6m hit from changes to the green pound, leaving profits pounds 3m lower at pounds 84m. Results from the animal feeds operation, which vies with Dalgety for leadership of the UK market, sank by a quarter, hammered by the collateral effects of mad cow disease on the British herd and animal feed imports made cheaper by the strong pound.

But perhaps the most disappointing performance from the core domestic businesses came from Allied Bakeries, where after two years of improvement, the bread wars have returned.

The price recovery of 1995 appeared to stall last year under the twin onslaught of a consolidated private sector and a renewed attack from supermarket own-label products. The latter, selling at 29p a loaf 12 months ago, are now down to 25p, where Mr Weston says neither he nor the retailer makes any money.

Even the harvest from ABF's cash pile has been poor, dropping from pounds 22m to pounds 28m after a disappointing performance from one of the group's four fund managers. They are now picking up less business from the group.

So with Henderson Crosthwaite looking for flat full-year profits of pounds 430m, after a pounds 30m or so currency hit, the shares at 508.5p, down 13p, are on a forward multiple of 16 and in need of that big deal to pep them up. Hold.

Bardon and Camas

fit like a glove

The excellent geographical fit between Bardon and Camas meant yesterday's merger to create Aggregate Industries was a deal waiting to happen. It makes abundant financial sense, attested to by the movements in the two quarrying companies' share prices. Bardon, which thanks to its unrelieved ACT is being used as the effective acquisition vehicle, rose 3p to 41.5p, with Camas 8.5p higher at 92.5p.

In the US, Camas is strong in the mid-West while Bardon's heartland is in the mid-Atlantic states and Massachussetts. At home, where analysts believe the market for aggregates is finally bottoming out Camas's strength in the South-west and Midlands is complemented by Bardon's Scottish and northern operations. Profitability in aggregates is determined by volume, pricing and costs, so rising demand, the prospect of last year's price rises being held or even bettered, and a reduction of pounds 10m in combined overheads means the deal should be handsomely earnings-enhancing.The collapse of the Government's road building programme, and the failure of the Private Finance Initiative to plug the gap, has dealt the industry a heavy blow, but what is not spent on new roads must inevitably go into maintenance. Environmental concerns, meaning new super quarries such as the two in Leicestershire the group will control will not get approval in the future, augur well for pricing.

In addition, analysts think the combined group has taken the pick of the two management teams to create a real force in the fast consolidating aggregates industry. On the basis of forecast profits of about pounds 32m for each company, the combined group is expected to make about pounds 65m in operating profit. Add in pounds 10m cost savings and factor in a tax rate of only about 28 per cent thanks to Bardon's unrelieved ACT and Aggregate should make around 4.3p of earnings per share this year. On the basis of Bardon's share price that means the enlarged group currently trades on a prospective price/earnings ratio of only 10 compared with a sector average multiple of about 12. With the prospect of one of the larger players stepping in to grab a share of the action before the marriage is consummated, that is an unwarranted discount. Either share is good value.

Full steam ahead

at Jarvis

All the surprises at Jarvis, the construction group turned facilities manager, have been on the positive side since it announced the acquisition of one of the privatised railway maintenance companies last year. As a result, the shares, up another 14p to 238.5p yesterday, have come close to quadrupling since May and are near their all-time high. The latest surge came on a "warning" from the company that latest results would "substantially exceed" analysts' forecasts.

The figures will be complicated by the decision to move to a March year- end, but they will still show that Jarvis continues to be on something of a roll. The maintenance business, now called Jarvis Facilities, is winning even more business from the railways than expected. That means redundancy charges, signalled at pounds 4.9m last year, are more likely to be pounds 2.6m for the latest 15-month period. Although a further charge of pounds 1m may be deferred into the current year, it is clear that the maintenance side has found work for more than 100 people it was otherwise expecting to lose, leaving a net loss of around 200 jobs. On top of the bread-and- butter work from Railtrack in its core northern area, originally worth pounds 353m up to 2001, the business is picking up work out of its region,

So Jarvis Facilities, acquired for a net investment of pounds 19m, could chip in operating profits before redundancies of pounds 14.7m in just over nine months with Jarvis. But the good news does not end there. The switch in "old" Jarvis from straightforward contracting to more turnkey work has seen it pick up business like building the Colfox School in Dorset, which will bring together the construction business, the training arm and the facilities management side in a deal that could be worth pounds 100m over 30 years. A pounds 3m car park for the Medway Health Trust is another example. These sort of projects should mean fatter margins and a steadier income stream. Together, yesterday's news should be good for another pounds 4.5m on profits, leaving an annualised figure of pounds 14.6m for last year, rising to pounds 27m. So on a forward p/e of 17, falling to 11, the shares are reasonable value.

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