The Investment Column: Heady cider sales fail to convince at C&C

Intermediate is worth holding; Avoid telecoms tiddler Fibernet
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The Independent Online

Announcing the arrival of a new, cool alcohol brand, launched this summer in some of London's better bars, made from some of nature's healthiest ingredients and offering drinkers a thirst-quenching pint served over crushed ice. It is Magners cider.

Cider? Cider cannot be successfully rebranded, surely? The Irish drinks group C&C Group has been launching its Magners brand across the UK with startling success. In Northern Ireland at the start of the decade and last year in Scotland, it has grown fast. Whether it is winning new drinkers over to cider, reclaiming those previously lost to alcopops, or just winning market share from the likes of Strongbow, you can see the numbers fizzing. In the six months to 31 August, C&C's cider sales rose by 28 per cent.

We were among those who scoffed when C&C floated last May and we advised shunning the stock. The share price graph opposite shows starkly the disservice we rendered. However, we would do no favours by performing a U-turn now.

While the early signs from London are strong and company optimism is high, it is too early to be sure cider can really be made cool in the UK. Yesterday's figures for sales in the much more established Irish market were flattered a little by the good summer weather, and C&C flags that it will have to put extra investment behind Magners, in terms of marketing and bottling plant expansion, which will limit profit growth for a while.

As for the rest of the group, which has been largely ignored by the City but which still accounts for a third of profits, performance is either dull or worse. There is little growth to be enjoyed from brands such as Ballygowan mineral water, Tayto's crisps and the liqueur Carolans. A switch in distributors for the spirits and liqueurs might disrupt sales in the coming year, while the snacks division is having to be restructured.

C&C is generating plenty of cash to pay down the debt that we worried about on flotation (now under €400m), but the valuation has increased to the upper limit of the drinks sector and a dividend yield below 4 per cent is not tempting. Time, gentlemen, please.

Intermediate is worth holding

Is there too much money sloshing about in private equity funds, pushing the valuation of company buy-outs unsustainably high and the returns dangerously low? This is a key question for investors in Intermediate Capital, a financing house which backs buyout vehicles.

Intermediate provides what is called mezzanine finance, a mixture of debt and equity. It earns high interest on the debt part, and gets a handy option on an equity stake which it can cash in when the business is sold on. In addition, the company charges a fee for running its increasing portfolio of mezzanine finance funds, which it invests on behalf of other institutions.

Unsurprisingly, given the acquisition boom, it is trading at record levels. If buy-outs are bigger, so is the slice of mezzanine finance. This is outweighing the effects of increasing competition from hedge funds, which have piled into this area because returns from their other activities appear to have dried up.

Intermediate's "core profit" was up 28 per cent in the six months to 31 July, to £44m. Core profit excludes the cost of its new investments and the capital gains it makes on equity sales. In the first half, these sales included stakes in IG Group, the spread betting firm which floated, and Focus, the DIY chain. Capital gains were a record £64.6m, up from £23.7m.

So to our opening question. Tom Attwood, Intermediate's managing director, has the Delphic answer: things happen slowly. We concur. There is still more steam in the M&A engine, and private equity deals do still stack up at current low interest rates. Intermediate's bad debt provisions are flat. Keep holding.

Avoid telecoms tiddler Fibernet

The telecoms sector is famously competitive, with brutes such as BT and Cable & Wireless battling for business amid an environment of relentlessly falling prices. Fibernet, the telecoms tiddler, claims it has an alternative story to tell, however, and that it should be thought of in a different light.

It does not operate in the mass-market supply of voice and data connections but instead offers large companies their own private networks for the high-speed transfer of data using its fibre optic cable technology. Annual results for the 12 months to the end of August show that the company managed to increase sales 13.5 per cent to £47.9m and losses were reduced from £5.7m to £4.4m.

The next two years, the company says, are crucial for achieving its goal of sustainable profit. Its pipeline of orders, which often take a year or more to negotiate, is worth more now than this time last year, according to the chief executive, Charles McGregor, so there are grounds for optimism that the company could break into the black soon. However, although Fibernet is in a niche business, it does compete against the likes of BT and, although this is only a tiny part of BT's business, Fibernet can expect its bigger rival to try to dominate this market.

During the year, Fibernet warned that some of its new business wins had been delayed and it finished the year with new contracts signed of £48.1m, below target and below last year's result of £53.6m. This should be a salutary lesson in how volatile and unpredictable telecoms services can be and, although Fibernet is doing many things right, it is hard to warm to its competitive position. Avoid.

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