The Investment Column: Shipbuilding tie-up helps VT Group to fire on all cylinders

Northern Foods; Kewill Systems
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The Independent Online

Our view: Buy

Current price: 631.5p

VT Group goes back a long way – Vosper and Thorneycroft started out in shipbuilding in the 19th century, long before the companies merged in 1966. VT still makes a significant chunk of its revenue from shipbuilding, and the joint venture to merge its shipbuilding facilities with those of BAE Systems should mean that it continues to do so for the foreseeable future.

Yesterday's first-half results were well received by the market – and rightly so. Strong organic growth and the rapid expansion of VT's support services work led to a 29 per cent jump in interim pre-tax profits to £42.3m, slightly ahead of most City forecasts. Revenue for the first half rose by 22.7 per cent to £573.1m.

Perhaps the key point to note for retail investors is the visibility of VT's future earnings. The advanced order book stands at £3.7bn, and although several major contracts are still to be signed it is a fair bet to assume most, if not all, will be won, potentially doubling the pipeline. A contract worth £3bn for the Military Flying Training Programme should be confirmed by Christmas.

The joint venture with BAE over the shipbuilding operations looks to beprogressing smoothly. VT has the option to sell its45 per cent stake to BAE, and conservative forecasts are for a possible returnof up to £380m from theJV. The venture shouldget full approval from both parties before the end of this year.

All in all this is a very strong set of interimnumbers, and the chances are that most analysts will move their estimates upwards. The shares trade on a fairly full valuation, 15.2 times forecast 2009 earnings, but that does not include the possibility of further contract wins and the takeover potential, which appeared in the markets again yesterday.

This is a business that is firing on all cylinders, and as such it deserves to trade at a premium. Buy.

Northern Foods

Our view: Hold

Current price: 98.25p

Although the commonwisdom is to sell on thefirst profit warning and buy on the third, we have lost count of how many warnings Northern Foods has given beleaguered investors over the past two years. But has the tide turned?

Interim results were ahead of expectations, as the company reported pre-tax profits for the first six months of the year of £20.1m, up 38 per cent and ahead of most forecasts. Earnings per share roseby 34 per cent to 3.2p, while the dividend, usually agood marker for how a company sees its future, rose by 3 per cent.

However, the maker of Goodfellas Pizzas and Fox's Biscuits still has much work to do, and is operating in a tough environment.

Not only are consumer tastes growing ever more fickle, but soft commodity prices are rising sharply, and although the company has passed most of those costs on to customers, the volume impact will only be neutral if all other suppliers follow suit and increase their prices.

Northern Foods has certainly turned a corner. The financial stability of the group looks far healthier, and management deserves credit for its part in the improved performance.

But that does not mean that the shares are good value – the stock trades at 12.5 times forecast 2008 earnings. That looks like a fair price, and given the headwinds of a tough consumer environment and uncertainty over commodity prices, investors should hold for now.

Kewill Systems

Our view: Buy

Current price: 95p

We last commented on the supply chain software group Kewill Systems back in June, and given the strength of yesterday's interim numbers an update is in order.

Since collapsing to under 10p in 2003 the company has made steady progress, and looks set to break through 100p for the first time since the dot.com bubble burst. But despite Kewill being dragged down with the boo.coms of this world, this was always a serious, real business making real money. Yesterday's interims were strong; group revenues rallied 28 per cent to £24.4m, while underlying profits soared 75 per cent to £3.2m. If investors needed a clearer sign that the dot.com bubble is well and truly behind Kewill, the company will reinstate the dividend. A quarter of a penny per share is nothing to get excited about, but as the first dividend Kewill has paid since 1999 it is a significant move.

The company has an impressive list of customers for its suite of supply chain management tools, including Marks & Spencer, DHL, Federal Express and J Sainsbury. Margins have improved to 13.3 per cent, and three recent acquisitions, CFS, IPACS and Innovate, made their first contribution to the numbers.

Kewill has come a long way since Paul Nichols became chief executive when the stock was at its nadir. On 12.8 times forecast 2008 earnings the growth is not being factored in by the market, but it looks in sound financial health despite a strong dollar headwind, and there is plenty of scope for more upside. Buy.

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