ABF shakes off Cinderella image

The Investment Column

Associated British Foods has been the Cinderella of the stock market for so long it is hard to believe that the shares have outperformed the All-Share index by close to a fifth since the start of last year. Even more surprising is that the change in sentiment is as much to do with the sugar and bread giant's underlying trading performance as its legendary cash pile.

Yesterday's half-year figures confirmed the market's confidence in the group, still controlled by 69-year old chairman and chief executive Garry Weston. Pre-tax profits up 14 per cent at pounds 198m in the six months to 2 March were well ahead of expectations and the shares responded accordingly with a 9p rise to 420p.

British Sugar, acquired from Berisford for pounds 880m in 1990, continues to demonstrate what a good buy it was. Profits rose by close to 4 per cent to pounds 87m in the latest period, despite a comparable period flattered by around pounds 5m due to the release of additional exports previously blocked under quota regulations. ABF's Silver Spoon brand has prospered under the heavy regulation of the industry. Thirteen devaluations of the EU's green pound in 11 months has done wonders for prices, although the latest rise in January has had the effect of pulling orders into the first half. ABF is warning the second half will not benefit to the same extent, but continuing demand for sticky drinks, confectionery and starch should underpin future growth prospects.

Milling and baking around a quarter of Britain's flour and bread has traditionally been ABF's Achilles' heel, given the cut-throat price war waged by the supermarket chains over the past few years. But even here there are signs that the business is holding its ground after the slow recovery that started last year. The bread price rise a year ago, the first for some time, plus a move to upmarket brands such as Kingsmill and Allinson helped Allied Bakeries lift its margins and profits. Henderson Crosthwaite says the business swam against the tide of falling margins in the rest of the food industry last year and at less than 5 per cent there remains further scope for recovery.

Retailing, helped by recovery in the Primark discount clothes retailer in Ireland, showed the strongest growth in the first half, raising profits 55 per cent to pounds 34m. The jury remains out on whether ABF will spend its pounds 454m cash pile wisely. Most of the pounds 3m profits contribution from North America in the latest period came from Kraft Foods' speciality oils and fats business, acquired for pounds 97m last year. Even taking account of pounds 3m restructuring costs, that return on capital is hardly exciting. Meanwhile, there must be a question whether the three Weston sons in the business, one of whom appears to be earmarked to succeed Garry, can fill their father's shoes. Even with Henderson's upgraded profits forecast of pounds 420m for the year, the shares look fully valued on a forward p/e of 14.

Farnell aims

for the top

Coming so soon after the acqusition of Premier there were no surprises in yesterday's full-year figures from Farnell, the world's third-largest electronic component distributor. The 22 per cent rise in pre-tax profits to pounds 75.5m was ahead of forecasts made during the bid but attention was firmly focused on chief executive Howard Poulson's assessment of the integration of Premier.

With such a large deal - the pounds 1.8bn acquisition dwarfed Farnell's existing business and sets the company up nicely for inclusion in the FT-SE100 - the success of that assimilation is crucial. If the claimed benefits of the deal come through, the newly renamed Premier Farnell will be one of the most exciting growth stories in the stock market's top flight. If not, the Jeremiah's will be lining up to say we told you so.

The news yesterday was as encouraging as anyone might have hoped at this early stage. On the important measure of service reliability, Farnell believes the former Premier businesses achieve their promised delivery times 85 per cent of the time compared with 70 per cent before the takeover. And with a way to go to match Farnell's 100 per cent success rate, the pessimists who claimed there was nothing to gain from the deal because Premier was already well run look wide of the mark.

The other good news to emerge from City briefings yesterday was an acceleration of the planned introduction of Farnell's catalogue into the US and Premier's Newark product over here. Analysts' forecasts for the year to next January have assumed no contribution from this source so could undershoot by a substantial margin if volumes start to motor in the second half.

Those estimates were usefully underpinned by last year's result, which benefited from a 17 per cent jump in sales to pounds 527m. Earnings per share of 37.5p were 21 per cent higher and the dividend payout, which has doubled in five years, rose 20 per cent to 10.8p (9p). Sales growth in the low- volume, high-margin components business continued with increasing margins at home making up for the costs of starting up in the Far East. The high- volume commodity operation is coping well with tougher trading conditions.

If Premier Farnell matches NatWest Securities' forecast of pounds 160m this year and pounds 223.5m next time, the shares, up 3p to 720p, stand on a price/earnings ratio of 20, falling to 16. That is a premium to the market, but deservedly so and, at a big discount to Electrocomponents, its supposedly risk-free rival, the shares are still good value.

Ronson builds on male brands

Howard Hodgson, the flamboyant former funeral director with a passion for Aston Villa, is not wasting any time in his transformation of the Ronson lighter and accessories group.

It is only three years since Hodgson alighted upon the company, then called Hoskins Brewery. Since then he has changed the name twice, first to Halkin Holdings and then to Ronson. Peripheral businesses such as the brewery have been sold while Ronson is re-invented as a kind of mid-market Dunhill.

The plan is to use the strength of the brand name - which is principally known for lighters and other smoking bits and pieces - and build a male branded accessories group that will eventually encompass a clothing range, sunglasses, leather goods and other accessories aimed at 18-35-year-old men.

The Hodgson plan was developing nicely before a fire in January destroyed the company's main warehouse and manufacturing plant in Newcastle. The fire broke out after the company's December year-end so did not affect last year's profits which surged by nearly 50 per cent to pounds 34m. But the impact will be felt in the first half of this year. Sales are expected to be down by pounds 2m to pounds 3m. Margins have been affected as the company has had to source products at higher prices in order to fulfil orders and keep customers. Negotiations with the insurance company are continuing with pounds 2.7m received so far and another pounds 3.5m still to come.

All this will mean that profits and earnings will be flat this year, though a return to growth is predicted for 1997.

Shares had fallen sharply since the fire in January, though they have recovered some ground since. The strategy remains unchanged but the fire creates some uncertainties this year, such as the details of the remaining insurance payment.

With house broker Williams de Broe expecting profits of pounds 4m this year and the shares up 3p to 54p, they are trading on a lowly forward rating of 8. Cheap on the face of it, but not without risk given the company's small size and the difficulties in re-grouping after the loss of the factory.

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