Cadbury's new head finds the City's soft centre

The Investment Column
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The Independent Online
The City seemed to warm to John Sunderland, the new chief executive of Cadbury Schweppes yesterday, marking the shares 19p higher at 529p after his first big presentation to the broking community. As well as the 16 per cent increase in full-year profits to pounds 592m, analysts liked what they heard from him about focusing the group more on shareholder value and his promises that Cadbury would be less profligate in its use of equity issues than it has been in the past.

Mr Sunderland takes over the group at an interesting time. While chairman Dominic Cadbury was pouring cold water on the possibility of a de-merger yesterday, he was also hinting that Cadbury could afford an acquisition of pounds 1bn to pounds 2bn following the sale of its half stake in bottling group Coca-Cola Schweppes Beverages for pounds 623m.

This hints at Mr Sunderland's main headache. Though Cadbury Schweppes is big, it is not quite big enough to battle it out with the likes of Coca-Cola and Pepsi in drinks and Nestle in confectionery.

In beverages, the acquisition of Dr Pepper has given Cadbury Schweppes more muscle, but the group still lost share in North America last year as a result of competitive pressures. Coca-Cola spiked Cadbury's guns with a marketing blitz for its Sprite brand before Cadbury had unveiled its Seven Up relaunch.

The reliance on third-party bottlers for its distribution following the CCSB sale seems to make Cadbury vulnerable, though Mr Sunderland was emphasising the strength of its licensing agreements with Coca-Cola yesterday. Hefty penalties would be imposed if any of its products were delisted by Coke.

In confectionery, Cadbury's expansion into new markets may take longer to generate returns than originally expected. The start-up in Russia has already cost pounds 18m and disposable income is growing more slowly there than forecast. There are also problems with black market imports. China will take another two to three years to break even.

It is in confectionery that the big deal is likely to come as recent deals in this division have been relatively small.

Looking forward, Cadbury Schweppes claims that Dr Pepper is growing ahead of its markets, while the long decline of the Seven Up brand is stabilising. But the threat remains from Coca-Cola, which is putting more resources behind Mr Pibb, a brand pitched directly against Dr Pepper.

In spite of the share price rise yesterday, many analysts left their 1997 forecasts unchanged at pounds 565m-pounds 580m. That puts the shares on a forward rating of 15. Given the competitive pressures and the recent run from last month's low of 468p, they are not worth chasing at these levels.

BICC slides on banana skin

Alan Jones, the new-broom chief executive of BICC, had reason to feel a little bruised yesterday. Despite his delivering annual figures to December in line with forecasts and net debt at pounds 80m close to half the level of expectations, the market marked the shares down 8p to 271.5p. They are now just above last October's 270p rights price, having underperformed the market by more than 50 per cent over the past three years.

Over the past two years, Mr Jones has unveiled a realistic strategy of revitalising the low-growth copper cables to construction business, while expanding the faster growing optical side, now aided by the pounds 170m raised in the cash call. His problem is that just as the business looks like being sorted out, BICC appears to find a banana skin to slide on.

Thus the pounds 131m swing into pre-tax profit of pounds 64m last year hid a rather flat result at the underlying level. Stripping out exceptionals, operating profits grew from pounds 150m to pounds 164m, a figure which itself would have gone backwards but for pounds 24m from three former British Rail maintenance contractors acquired during the year. Without those the Balfour Beatty contracting operation would have swung from an pounds 18m profit to a pounds 14m deficit.

But the real cloud hangs over the European cables business. Draconian measures to cut spending at Italy's state-owned ENEL electricity group ahead of privatisation are hitting BICC's power cables operation there and Mr Jones is signalling it will be next to face his scalpel, following similar measures over the past 12 months in the US and Germany.

There are signs that his efforts are bearing fruit. US cables' profits were up two-thirds and cables is close to his target of 20 per cent return on capital. Longer-term, the pounds 115m or so to be spent over the next two years on optical fibres, cables and the Asia-Pacific region should deliver growth in the high teens for the most exciting third of BICC's business.

Full-year profits of pounds 165m would put the shares on a forward multiple of 18. High enough.

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