The Investment Column: Real estate trust move returns quick dividend for Liberty

Carr's Milling Industries; Xaar
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The Independent Online

Our view: Hold

Share price: 1,318p (+28p)

Liberty International's switch to real estate investment trust (Reit) status will start paying off for investors from year one. The property group said yesterday that its shareholders can expect a higher dividend payment in 2007 thanks to the tax savings it will make as a result of its conversion to a Reit on 1 January.

Liberty, which is focused on owning regional shopping centres up and down the UK, also posted a solid set of annual results. Pre-tax profits showed an underlying rise of 28 per cent to £155m and allowed the group to raise its dividend by 10 per cent to 31p a share. However, the value of its assets did not keep pace with the wider sector in 2006, particularly when compared to the rise in the price of London office space. Saying that Liberty is enjoying strong trading across its estate which is now fully occupied.

Among the more famous shopping centres the group operates are the Manchester Arndale and Cribbs Causeway in Bristol. Its estate yields 4.8 per cent, which is a lot better than the return offered by retail parks or City of London offices and West End property. In the event of an economic slowdown or property market correction, Liberty is well-shielded thanks to the prime locations of its malls.

Carr's Milling Industries

Our view: Hold

Share price: 550p (-92.5p)

High wheat prices are taking their toll on Carr's Milling, the animal feed and fertiliser maker. They were to blame for the profit warning the group issued yesterday which left its shares as one of the worst performers in the stock market.

Wheat is a key raw material for two of the group's activities - flour making and animal feed. In the flour business, despite its best efforts, Carr's has been unable to pass on these higher costs to its customers, which has weighed heavily on its profit margins. In 2006, this unit made a profit of £3.3m. Following yesterday's news, City analysts believe it will do well to make £1.5m.

Carr's is suffering a similar situation at its animal feed division. Again, higher raw material costs have not been passed on to customers and matters have not been helped by the fact that diary farmers are quitting the industry in large numbers due to poor returns, resulting in surplus capacity in animal feed.

There was also some evidence that Carr's fertiliser business is encountering difficulties. Subsidy payment delays and higher selling prices - inflated by the high cost of gas - are to blame here. The company hopes volumes will pick up as we go into the main fertiliser season.

Overall, brokers downgraded their forecasts for Carr's pre-tax profits to £5.7m from £7.3m. This leaves the stock trading at around 12 times forward earnings which is not expensive. The shares will become even less expensive when raw material prices fall back - they cannot stay at these inflated levels forever. Now is no time for investors to abandon the company.


Our view: Buy

Share price: 239p (+10.5p)

When a company announces that talks aimed at its takeover have failed it is usual to see its shares slump. However, the opposite happened yesterday at Xaar. The printing technology group said it had terminated offer negotiations with Danaher, the US industrial conglomerate, and yet its stock gained 4 per cent.

Danaher is believed to have originally offered between 200p and 220p a share for Xaar and then went on to raise its offer. But the improved terms were not good enough to secure the support of Xaar's board. Analysts take the view that if Danaher was intent on success it needed to bid around 300p.

Xaar is something of a rarity these days - it is a successful British manufacturing company. It makes ink jet print heads for large printers used in producing outdoor billboard posters. In the US around half of all billboard posters are made using Xaar's equipment.

The group's management were right not to rush to sell out to Danaher. An update to the City yesterday showed that the strong trading it enjoyed during the tail end of last year has continued into 2007. Meanwhile, Xaar's longer term pros-pects also look to be solid as the markets in which it operates expand quickly.

The move from analogue to digital that is being witnessed in the printing industry at present is a particularly positive trend for Xaar. The company also believes it can move into new parts of the industry such as identity card and passport printing and labelling.

Xaar will post its 2006 results in March. They are expected to reveal a pre-tax profit of around £7m and should rise to £9.1m in the current year.

At 22 times forward earnings, the stock is not cheap, but given the company's market leading position (which allows it to boast a gross margin of over 50 per cent) it is well worth backing for the long-term.