The Investment Column: Take a bite out of deal-hungry Premier Foods

Findel; Biotrace
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The Independent Online

Our view: Buy

Share price: 315p (+0.5p)

Premier Foods is hungry for acquisitions. The food group behind Branston Pickle, Hartley's jam and Crosse & Blackwell sauces stressed this point at its annual meeting yesterday where Robert Schofield, the chief executive, told shareholders he is running the slide run over a number of possible deals.

Premier is known to be interested in the UK biscuits arm of United Biscuits and in Campbell Soup Company's UK business, which owns Oxo cubes, Homepride bread and Batchelor's soup.

Bulking out is certainly important for the company. At yesterday's close, it is worth just £778m. Scale is important because along with cost savings it gives food companies more power when negotiating with supermarkets.

These days the likes of Tesco and Asda prefer to deal with a few suppliers who own as wide an array of products of possible.

Analysts estimate that the Campbell business being eyed by Premier is worth about £450m, while the United Biscuits assets would cost it £720m.

Given that Premier has about £580m of debt already, buying will require a significant rights issue from the company. In this type of deal there is a very real danger Premier might end up overpaying. It certainly will not be the only food group interested in swallowing these assets.

However, Premier's management has a very good track record when it comes to paying the right price for deals and then integrating them successfully. It has stringent acquisition criteria and it is not afraid to walk away from a business that does not meet them, while recent acquisitions, such as that of Quorn, the meat substitute, have been digested well.

Premier shares gained ground since the food group made it clear it was considering a major purchase. This indicates it will have little trouble getting a rights issue away. Meanwhile, its existing operations continue to perform well. The trading statement the company issued at its annual meeting yesterday boasted of "positive sales development across our portfolio" and assured the City that rising input costs are being offset by efficiency gains and price increases.

At 315p, the stock trades on a forward multiple of 12.5 and is underpinned by a 4.5 per cent dividend yield. Buy.


Our view: Take profits

Share price: 545p (-27.5p)

There aren't many home shopping companies with a profitable sideline in Bunsen burners.

In fact, it's probably fair to say Findel is unique. Keith Chapman, the chairman and founder, moved into supplying schools with all their educational paraphernalia to bolster softening sales at its catalogue shopping division. Judging by yesterday's results, it is just as well that he did.

A poor festive season for Findel, flagged up in December, hit profits at his home shopping arm. Catalogue companies rely on Christmas coming early, but that didn't happen last year, when consumers were reluctant to spend money on presents up until the last moment.

Operating profits at the division fell 21 per cent to £31.9m. Exacerbating matters, it spent £5m more than expected on restructuring the unit.

Happily the educational division, which has 12 per cent of a very fragmented market, fared much better, scoring top marks from analysts for beating their estimates. A string of acquisitions drove profits 78 per cent higher to £27.6m.

That sort of growth should continue given that the Budget in March promised to bring the amount of money being spent on state sector pupils up to that seen in the private sector.

Overall, group profits before tax fell 15 per cent to £35.1m after clocking up £17m in restructuring costs and amortisation.

After a tricky year, Mr Chapman decided the time was right to shake up the management and create the post of chief executive. It is being filled by Patrick Jolly, who has been one of Findel's non-executive directors for five years. Mr Jolly has promised a strategic review - it is hard to imagine that he will come up with any fresh ideas. Given the rise in the stock since we last tipped it a year ago, investors should take profits.


Our view: Worth a punt

Share price: 97p (+2.5p)

Biotrace International's germ-testing equipment is a defence against everything from listeria in food to biological warfare. Yesterday came news that Nato had awarded the group a contract to supply field laboratories which will test the air for nuclear, biological or chemical weapons.

The deal will generate about £1.2m in revenues for Biotrace this year and a profit of £200,000. The company also supplies the bulk of the equipment that goes into labs. This needs to be renewed regularly and adds to the profitability of the contract.

However, the defence industry is not Biotrace's biggest client. It gets the bulk of its revenues from industrial markets. Although these tend to be lower-margin sales, they are much more reliable.

From an investment point of view, Biotrace is a recovery play after a number of earnings disappointments in recent years. Analysts expect it to make a profit of £4.3m this year. This leaves the stock trading at about 11 times forward earnings. If it meets this target, the shares should motor.

But given its track record, this is not a company for the faint-hearted. For the brave, it is probably worth a punt.