Anticipating the millennium

THE INVESTMENT COLUMN

While the best gains in investment are likely to accrue to people with the time and dedication to seek out value in individual companies, for the vast majority that is not a viable option. If you are not a professional investor, you have to make fewer and longer-term investment decisions and for that reason they have to be better ones.

Looking towards the millennium a number of extremely exciting growth areas are emerging that should form the basis of everyone's thinking about investment. Emerging markets in areas such as South-East Asia, Latin America and eastern Europe have received plenty of coverage and pooled investments in these markets should be part of any well-diversified and long-term portfolio.

Even within the mature economies of Europe and North America there are fast-growing areas, which as the second chart below shows have been and are likely to continue to be extremely rewarding investments.

One theme highlighted by several investment experts in their annual start- of-year forecasts is the rapid ageing of populations in most Western countries, a demographic shift likely to have an enormous impact on spending patterns. Many areas of the economy will benefit from this change, not least healthcare, which already soaks up a huge chunk of American GDP.

You only have to look at the corporate activity in pharmaceuticals, biotech, medical devices and services over the past three years to realise that a massive consolidation phase is sweeping the industry as the big players jockey for position. That has been one of the driving forces behind the growth in funds invested in the sector of which the GT Healthcare fund shown below is just one example.

In the US, the rapid growth of so-called health management organisations has been a remarkable pheno- menon of the 1980s and early 1990s as the first chart shows. HMOs, which unlike traditional medical insurers also contract with doctors and hospitals, are expected to have half the American population as members by the end of the century compared with only 10 million in 1980.

Health-care is only one of the likely beneficiaries of an ageing population. As we discussed in this column last week financial services companies tend to do well as the average age rises because older people tend to save and invest more. That favours companies that manage other people's money, fund managers, stockbrokers and insurance companies.

Other winning sectors will probably include security as older, wealthier people become increasingly nervous about rising crime levels. Beneficiaries of increased crimes against property and crimes of violence include privatised prisons, alarm companies, security guard companies and surveillance businesses. An investment premised on the ageing population should also look to include exposure to increased spending on leisure and tourism, likely to grow faster as the standard of living increases in emerging countries.

Diverse deal for Abbot Mead

Abbott Mead Vickers passed a milestone yesterday with the acquisition for up to pounds 15m of the public relations consultancy Fishburn Hedges Boys Williams. Although AMV is the UK's second-largest advertising agency after Cordiant, the latest deal means that in future it will derive less than half its total revenues from that source. It is the latest stage in the controlled diversification strategy mapped out by the chairman, David Abbott, and chief executive, Peter Mead, which has taken the group into areas such as design, promotion, direct marketing, magazine production and posters - all the business described as "below the line" in the jargon.

Unlike others in the business, AMV appears to have bought well. A string of conservatively financed deals since the mid-1980s helped the group weather the advertising bloodbath in the 1990s, with profits bottoming out at pounds 4.72m in 1992 and reaching pounds 8.22m in 1994.

The latest deal appears to run in the same vein. Fishburn Hedges' profits have risen from pounds 852,000 in 1994 to an unaudited figure of over pounds 1.1m last year. Net assets in December were pounds 469,000.

On the basis of those figures, AMV is paying pounds 4m in cash down and a further four additional payments of up to pounds 11m in total over the next three years. With the exit p/e ranging from two to 10 times, if profits exceed pounds 2.25m by the end of the century, that should make the deal comfortably earnings- enhancing for the group and helps explain yesterday's 2p rise in the shares to 469p.

Coming on top of deferred payments for previous acquisitions, the latest deal will have more than wiped out net cash, which totalled pounds 4.2m in December 1994. But while AMV will still not be constrained if further purchasing opportunities come up, its main attraction must come from the continued growth of its advertising business.

Profits of pounds 13m in 1996, up from an expected pounds 10.6m last year, would put the shares on a prospective multiple of 20. High enough, even with the US advertising group Omnicom sitting on a quarter of the equity.

`Mad cow' misery at Sims

Shareholders in Sims Food, which supplies meat and poultry to supermarkets, must be wondering if the company has been breaking mirrors, such is its run of misfortune. In the past seven years it has issued six profits warnings and two cash calls. Its shares have slumped dramatically, from 339p three years ago to 28p yesterday.

The latest trauma is "mad cow disease", or BSE, which has badly affected sales of beef. Its meat sales are thought to be down 10-20 per cent. Sims is likely to pass its final dividend for the full year to March 1996. These results are likely to be particularly awful as they will be wrecked by asset write-downs. The company is in talks to sell its red meat business which supply meat to supermarkets and to the catering trade. These divisions accounted for 80 per cent of Sims's pounds 285m sales. Their disposal will leave the company with only its manufacturing operation which makes beefburgers and sausages. These are higher-margin sectors but, in the current food environment, hardly likely to yield high growth.

Analysts' forecasts range from a pounds 1m operating loss to a pounds 1m operating profit for the year to March, though the pre-tax figures is expected to be a heavy loss. It is a dismal tale but possible take-over action offers a crumb of comfort to the company's bruised shareholders. Sims has already received offers for the whole company.

Meanwhile PDFM, the fund manager, has been increasing its stake and holds 22 per cent. Perhaps it senses a deal coming that would put everyone out of their misery.