Bottom Line: Market topping

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The Independent Online
CANADIAN PIZZA, the latest company to put itself forward for Stock Exchange quotation, will have little difficulty generating support for its coming flotation. Investors are in bull market mode and the weight of institutional money looking for a home in equities could ensure that almost anything will get away.

For Canadian, a maker of pizza bases, it is just as well. In common with most food manufacturing companies, it is vulnerable to the ultra-cost-conscious supermarkets.

Management is confident almost to the point of complacency that it can hang on to its healthy profit margins. Canadian says pizza bases are only a small part of the total cost of a pizza and supermarkets will concentrate cost-cutting efforts on toppings or labour which, with higher units costs, give more scope for streamlining.

That is true enough, but one look at Canadian's operating margins of 18 per cent shows that the retailers have plenty of margin to shave if they choose to attack. Evidence yesterday from J Sainsbury suggests supermarkets are not feeling at their most charitable.

And unlike Devro, another specialist food manufacturer that came to market in the summer, Canadian could quickly find itself becoming stifled by competition. Devro, a maker of synthetic sausage skins, is protected from competition because efficient production of skins requires expensive machinery. Baking skills aside, commercial manufacture of pizza bases presents no such barriers.

The price of the shares has been set at 200p, equivalent to 15 times earnings for the year to 31 December as forecast by Canadian. That is a discount to the market average but a premium to the sector. Not one to linger over.