The Investment Column: ABF has longer-lasting flavour

Persimmon is a bargain in the housing market; Old Mutual is too risky a prospect at the moment
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Associated British Foods is the unlikely sounding name for a company that houses one of the retail sector's undisputed gems: Primark.

Associated British Foods is the unlikely sounding name for a company that houses one of the retail sector's undisputed gems: Primark.

ABF's products span Ryvita crackers to Twinings tea, but a trading update revealed that it is Primark which is putting in the strongest performance. Sales are soaring faster than this summer's hot wedge heel. The cheap and cheerful fashion retailer dominates such diverse shopping hotspots as Manchester's Arndale Centre and Kilburn High Road, and underlying sales are expected to rise by about 6 per cent during the six months to 5 March, matching the growth it achieved last year.

Primark's success in bagging six of the choice stores from Allders' administrators (albeit for a whopping £110m) means its expansion plans for 2005 are already ahead of target. Yet the company maintains it can further increase its 121-strong UK estate. The group is also dipping its Primark-dressed toe in Spain, where demand for cheap but chic clothes has already produced the mighty Zara.

Primark contributed just under a quarter of the group's £478m profits last year ­ about the same as ABF's British Sugar arm ­ and shows no signs of stopping there.

ABF is a company generating more cash than it can find opportunities to spend. Its shopping list last year included Burns Philp's international yeast and bakery businesses and Billington's UK sugar business, and all the acquisitions are performing well.

As for existing products, from its grocery arm, ABF yesterday highlighted growth from its Kingsmill sliced bread brand. In Australia, however, tough competition is taking a bite out of profits at its George Weston Foods Bakery business.

There is just one month to go until the actual George Weston takes over from Peter Jackson as chief executive, yet investors need not fear. As an ABF "lifer" (his family controls the group) there is no danger of the new arrival changing the strategy.

This column has long found ABF's story tasty and the shares have risen by another 20 per cent since we last tipped them last autumn. Taking profits never hurts, but they remain a core holding.

Persimmon is a bargain in the housing market

Persimmon's chief executive, John White, was talking yesterday as if the last eight months of 2004 were as bad as it was going to get in the housing market, and we are now into the sunny uplands of a sustainable housing market. Things could get bumpy yet, and a re-rating of housebuilders' shares (depressed by the catastrophes of the early Nineties) may have to wait. But have confidence that the housing market will avoid a crash and share prices will stay on an upward trajectory.

Persimmon is already one of the most highly valued of all the housebuilders, but is very cheap relative to the market on a multiple of less than 7 times this year's likely earnings. It is a bargain relative to the stock market as a whole. Yesterday, it also dramatically raised its dividend by half, and yields at least 3.5 per cent now.

One of the biggest and best-managed companies, Persimmon also has one of the longest land banks in the industry, giving it very nearly five years' worth of future development land, and much more flexibility. It will be able to be choosy if land prices don't ease to reflect more modest expectations for house prices. Mr White accepted that, on measures such as return on capital, 2004 was about as good as it could get, and some analysts have "sell" recommendations on that basis. But Persimmon has shown itself quite willing to build fewer houses in favour of keeping those returns high. And the bottom line is, that is what is important.

We said buy a year ago at 597p. At 778p, hold.

Old Mutual is too risky a prospect at the moment

Jim Sutcliffe, the chief executive of the South African financial services group Old Mutual, jokes that if he were to win an auction of a closed life fund in the UK, he would probably think he had overpaid. His caution is, on balance, a good thing, but the company's acquisition strategy in the UK is still its Achilles heel. The general charge is incoherence, the specific one is that previous deals were misjudged and had to be unravelled at great cost.

The company is well aware of all this, of course, and is doing its best to move the City's focus to other areas of the group which are doing well. There was much to laud in yesterday's annual results. Mr Sutcliffe has taken real control over Nedcor, the South African bank in which Old Mutual has a majority stake, and is pushing through a restructuring. Now, Nedcor is back in the black and could take some advantage of the lending opportunities in a surging South African economy. There was also good news on sales of life products in the US.

Yet this remains a risky group, exposed to currency and political risk, as well as the dangers of a hiccup in the Nedcor restructuring, and questions over its ability to do a useful deal in the UK.

The 11 per cent rise in the rand against the pound made for a much improved sterling results, and Old Mutual shares are now 141.75p. We said avoid at 104p last year, and the valuation still seems a little ahead of events. Wait a little longer.

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