The Investment Column: Watch for appetising profit growth at RHM

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RHM's initial public offering 13 years after it was swallowed by Tompkins gives prospective shareholders the chance to buy into a strongly branded food business at the sort of price normally reserved for supermarket own labels. What's more, profit growth looks in the bag for the next couple of years as Ian McMahon, the chief executive, makes hay by slashing the overhead costs that RHM's past two owners were happy to let mount up.

With brands such as Bisto, Paxo, Sharwood's and Mr Kipling, RHM's products are as much of a supermarket shelf as kitchen cupboard staple. Which offer some protection from the sort of bloodbath supermarkets like to inflict on suppliers. The flip side is that only half of its turnover comes from branded goodies, with the other half from private label contracts, which are more susceptible to grocers' bully-boy tactics.

Mr McMahon knows that organic profit and sales growth will be a struggle given that the group operates in mature markets. On top of that, the company will have a hefty pension deficit to deal with and debt of £711m. None of those issues should hold the group back.

Until Mr McMahon arrived, the group's businesses were all run autonomously: by putting them together he can take costs out of the supply chain, the factory base and head count. Panmure Gordon, an independent broker, says it should make up to £68m of gross cost savings by 2010. This should mean compound profit growth of 5 per cent a year.

Whispers last night suggested that the shares, which start trading on the main market this morning, would be priced towards the top end of the 228p to 285p price range. At 285p a share, RHM will have a market capitalisation of £975m and will be on a forward price/earnings ratio of 11.7 times. That looks good value considering the group has pledged to pay at least £55m out in dividends this year, which even at the top valuation yields a tasty 5.6 per cent. Buy.

Wolseley looks to the US for success

A booming US housing market is driving the bottom line at Wolseley, the acquisition-hungry distributor of building materials, heating and plumbing.

While demand in Britain has tailed off and the rest of Europe is sluggish, the US market has defied fears of a softening and is powering ahead. Which is handy, given that 60 per cent of the group's earnings come from across the pond.

The strengthening of the dollar has worked in Wolseley's favour, helping operating profits rise 15 per cent in the 11 months to June. That's only half the rate of the previous year, however, with flatter commodity prices keeping a lid on earnings growth.

Over the past decade, Wolseley has snapped up about 250 businesses for a total of £2.5bn and has set aside £225m for acquisitions. This financial year, Wolseley has gobbled up 26 companies.

However, the builders' merchant dampened speculation yesterday that it had set its sights on the do-it-yourself chain B&Q or its parent company Kingfisher.

Trading at 13.6 times 2005 earnings, and with plenty of scope for growth, Wolseley remains a core sector holding.

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