An unusual love affair at Clark

INVESTMENT COLUMN
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The Independent Online
Peter Aikens, chief executive of Matthew Clark, has done well by the shareholders who have backed him since his arrival at the drinks group in 1990. In the intervening period, the shares have outperformed the rest of the market by more than 50 per cent, even after yesterday's 2p slippage to 691p.

The stock market's love affair with Clark is unusual, as much of the growth has been fuelled by acquisition - an approach that has generally been frowned on after the excesses of the 1980s. Despite that, the strategy has been pushed into overdrive recently. Yesterday's interim figures showing pre-tax profits more than doubled from pounds 7.19m to pounds 15.4m in the six months to October reflected the pounds 109m acquisition of the cider-maker Gaymer in 1994.

The first full contribution from Gaymer, which doubled the size of Clark's branded drinks side, makes the figures hard enough to interpret, but they have already been rendered obsolete by November's pounds 271m acquisition of Taunton Cider, which doubled the size of the whole group.

The company says it is impossible to strip out the underlying performance of the acquired businesses. However, progress seems to be running ahead of plan. Savings already achieved at Gaymer, amounting to pounds 10m, are already pounds 1m ahead of expectations. With some of the early benefits dropping through to the bottom line in the first half, the first contribution from its Olde English to Babycham brands pushed Clark's branded drinks profits from pounds 5.1m to pounds 14.1m in the period. Meanwhile, most of the pounds 11m savings forecast from Taunton are expected to be in the bag by April.

But with close to half its sales now coming from cider, Clark may have to relinquish those gains to stay ahead in what has been a fiercely competitive market. The main threat has been in the rapidly growing value-for-money and own-label market, which represents 40 per cent of Clark's production, where the supermarkets' buying power has squeezed margins.

Since last November's Budget, it has also faced the need to absorb the Chancellor's new strong cider duty on its Diamond White premium brand acquired with Taunton.

With something of a pause in acquisitions promised, Clark's strong cash flow should ensure that gearing falls from its current 50 per cent to below 20 per cent by the end of next year. Meanwhile profits of pounds 46m this year would put the shares on a prospective multiple of 15. Fair value, while the results of the recent heady growth emerge.

Promises kept at Carpetright

Sceptics who questioned the chunky 22 times multiple at which Sir Philip Harris's Carpetright floated in 1993 have been forced to eat their words. Sir Philip, creator of the Harris Queensway stores business, has been as good as his word. He promised to capture 15 per cent of the UK carpet retailing market in four years, a target he has nearly met in two-and-a-half after taking it to 14 per cent in the past six months. He has also more than delivered on his promise to have 200 stores open by this year and move upmarket. The current total is 221 stores and Sir Phil has unveiled Premier Carpets, an in-store concession that appeals to the buyer of fitted carpets ready to spend a bit more.

Despite probably the worst market for household goods since the Second World War, the results have come through strongly. Pre-tax profits in the half-year to October, up 26 per cent to pounds 10.1m, are well over three times what Carpetright made in the whole of 1991/2. With net cash of pounds 24.1m, the company has had no difficulty lifting the interim dividend 41 per cent to 5.5p.

Sir Philip's skill at the bottom end of the market is vividly illustrated by these figures. A 15 per cent fall in the market, exacerbated by the hot weather, was counteracted by a series of promotions, with the hit to gross margins a mere half a per cent.

Whether he will be as successful with other formats remains to be seen, but Premier Carpets and the move into edge-of-town superstores under the Carpet Depot name have addressed concerns that Carpetright is running out of steam. Premier concessions should eventually spread to all MFI and Sainsbury's Homebase outlets, giving scope for 120 eventually. Meanwhile, Carpet Depot takes the group much further into large credit sales, with a potential for 70 stores.

With Carpetright now covering the market and plenty of share still to go for, the future looks bright for Sir Phil, whose family owns 30 per cent of the shares. But even if the company produces profits of pounds 26m this year, the shares up 15p at 439p, are high enough on a prospective multiple of 20.

Question marks at Persimmon

Persimmon has been looking to boost its volumes for some time now and had a good look at Tarmac's housing business when it came on the market last year. The deal with Trafalgar House, therefore, comes as no surprise, even if it raises as many questions as it answers.

At an estimated price of between pounds 150m and pounds 175m, the acquisition of Ideal Homes is a big deal for Persimmon, which has a market value of only about pounds 230m itself. It will put the company into the number three slot, up there with Wimpey, Beazer and Barratt, and satisfy the ambitions of its chairman, Duncan Davidson.

The acquisition's advocates will point to the continuing consolidation of the industry and trot out a batch of statistics that suggest the deal is pretty sensible. On brokers' initial estimates, earnings should be slightly enhanced in 1996 and at a plot-cost to selling-price ratio of about 22 per cent this is not a bad way of getting to 6,500 units a year with a 2.7-year land bank.

But some industry watchers worry that Mr Davidson is something of a volume junkie who will seize this opportunity to become the country's biggest housebuilder even if the price to be paid is high. He engineered a big push at the end of 1994 in the hope that the market would improve last year and then found Persimmon's overhead base and the stagnant market at odds with each other.

Although the consensus is that the housing market is on the mend, the capacity of the industry to disappoint is significant. Now might well be a good time to gear up to recovery but such a strategy is not without its risks. The other worry is that with a current yield of 6 per cent on Persimmon's shares, a sizeable rights issue is an expensive way to pay. It is, however, the only option - even with this mix of cash and shares Persimmon will end up with gearing of perhaps 50 per cent.

On the basis of a pro forma profits forecast of pounds 36m this year, the shares stand on a prospective price/earnings ratio of 14.4, cheaper than the housebuilders as a whole but more expensive than Barratt (13) and Berkeley (13.8). High enough.

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