The Investment Column: Back Lovell to get Jarvis on the right track at last

Takeover hopes should stop merged dairy group Arla from curdling; Splitting LMS into two is the signal to buy
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The Independent Online

It is surprising that Jarvis is still here. The rail engineering, road maintenance and facilities management business almost collapsed under a weight of debt and the fall-out from the Potters Bar rail crash in 2002, which happened while it was responsible for track maintenance.

Shareholders who stuck with the business now own less than 5 per cent of the equity, because debtholders swapped £350m of their holdings into new Jarvis shares. That swap at least gives Jarvis the chance of a recovery, and risk-takers should consider buying the shares.

Jarvis is concentrating now on two divisions: rail and plant, and roads. The former lays track for Network Rail and hires out mechanical equipment to the network's in-house engineers, who have taken over day-to-day maintenance. This is a cash generating business. There will be less work in the future, now that a big programme of track renewal is drawing to a close and Network Rail is cutting costs, and Jarvis is going to have to replace some of its ageing equipment. But there will also be fewer contractors working on track laying, and Jarvis is hopeful of gaining market share.

The road repair and white line painting business is operating at a loss currently, but efficiencies will feed through to improved cashflows from here.

And then there is the gradual exit from construction and facilities management, where the finishing of loss-making building work and the renegotiation of unprofitable long-term maintenance contracts have already been properly provisioned for.

The last piece of the jigsaw is the renegotiation of the company's debt facility. Although debt is just £6.2m now, a year more of losses will push that to a peak of about £30m and its interest rate is set to rise. A new facility is just around the corner, which really will set Jarvis free.

Any glitches or delays, and all Jarvis's careful financial plans could be left in tatters, but management - both the current chief executive, Alan Lovell, and Richard Entwistle, the chief operating officer set to replace him next year - are worth backing. Buy.

Takeover hopes should stop merged dairy group Arla from curdling

The milk wars of 2004, in which the major supermarket chains ditched and switched their suppliers, left the dairy industry bloodied, having to accept lower prices. At least Arla Foods, which merged with Express Dairies in late 2003, emerged triumphant in volume terms, creaming in a 47 per cent share of the market after winning the sole contract to supply Asda as well as substantial contracts with Morrisons and Tesco.

Announcing a 5 per cent rise in annual profits yesterday to £44.5m, Arla said it had delivered record volumes to the supermarket sector. It has also seen strong growth in its branded butter and spreads. Spreadable butters are growing at 9 per cent a year, and Arla's Lurpak and Anchor brands control 90 per cent of this sector. Reduced fat versions of Lurpak and Anchor spreads are enjoying double-digit growth. Another booming sector is organic milk. This market grew 42 per cent this year, and here, too, Arla is Asda's sole supplier.

But with such a large production, packaging and distribution operation, Arla is struggling against rising oil and energy costs. Price rises are an imperative, although a £75m investment in its facilities should bring greater efficiencies.

Arla's milk position is secure, and its branded business is also growing rapidly, but rising costs will make the coming year difficult. Speculation that Arla amba, the farmers' co-operative that owns 51 per cent of the company, may launch a full takeover bid should stop the shares from curdling. Keep refrigerated.

Splitting LMS into two is the signal to buy

London Merchant Securities has long been a weird beast, but it is about to get less weird.

It is a property company with a buoyant portfolio of £1.1bn of offices in London's West End and retail property scattered across the UK. But it also has a £219m investment portfolio, with stakes in early-stage technology ventures and companies serving the oil and gas industries.

It is splitting the two businesses, it said yesterday.

The benefits of this move - the details of which will be finalised in the new year - will accumulate over 2006, making now a good time to repeat our share tip of June 2002.

We live in a time of low long-term interest rates, making it easier and cheaper for LMS to fund its property acquisitions through debt, rather than relying on sales of stakes from the investment division. The demerger will also remove an obstacle to LMS's conversion into a "real estate investment trust", allowing it to enjoy the associated tax breaks.

And the investment side will get a new lease of life under a new chief executive with a brief to bring in media company investments and to downplay the technology portfolio.

The shares, 152.5p in 2002 and 235.5p yesterday, are a buy.

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