Flavours tasting good at AB Foods

Best to play it cool on risky Kewill; Wetherspoon gives no cause to celebrate
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The Independent Online

Associated British Foods has produced a tasty set of full year results, and the good news is that it ought to be doing even better. As the cash-rich conglomerate's Peter Jackson admits, there are poor performers hidden within the strong growth in sales and profits.

His philosophy is to let managements of the various parts of the empire get on with the job - as long as they do well. When, as in Australia last year, a division underperforms, intervention from the centre is decisive. Costs were cut, the loss-making biscuits operations sold.

This formula seems to work in a group that does not naturally hang together. Indeed, some in the City feel it ought to be broken up and, in particular, that the Primark clothes retailing chain does not fit.

Yet group profits increased by 10 per cent to £473m in the year to 13 September, with contributions from all four divisions: groceries, primary foods, ingredients and Primark. The consensus is for more than £500m next time.

Mr Jackson cites Primark as a prime example of his "leave well alone" philosophy. Most of the management has been there a long time. Far from getting rid of Primark, he would like to expand to areas of the country where it is unknown. Cities the size of Liverpool and Leeds have no outlet.

In foods, Ovaltine, a beverage that has suddenly taken off in Asia, and Mazola cooking oil have proved particularly successful acquisitions. Both are showing double-digit growth.

Despite the acquisitions and capital spending, the cash pile stands at £1.2bn. Calls to spend it or give it back to shareholders are reminiscent of the carping that used to be aimed at Lord "Miser" Weinstock when he ran GEC. Investors who saw the GEC cash pile squandered in the transformation into Marconi may feel Mr Jackson's cautious approach to spending is right.

The shares eased 3.5p to 558p yesterday. The dividend is up 10 per cent at 14.6p and the prospective yield is 2.7 per cent. Not especially cheap, but still worth buying.

Best to play it cool on risky Kewill

Kewill Systems has long been a favourite punt for those on the stock market's gambling fringe. The software group has been through a painful restructuring (the profligacy of having 18 offices in the US has been stopped and many salesmen are now working from home), but yesterday it was able to boast that on both sides of the Atlantic it is turning in a profit once again.

Pre-tax profits in the six months to 30 September were £499,000, compared with a whopping £5.7m loss last time.

So two cheers for the new management - one for the restructuring, one for refocusing the group away from the most competitive areas and on to supply chain software aimed at bigger companies, where Kewill can be sure it will get plenty of ongoing revenue from servicing its software across a big group such as Mazda or Pratt & Whitney.

For the third cheer, we really will need something better than the (flat) sales figures turned in yesterday. Kewill says its products can help mail order companies - such as Gap.com in the US and Littlewoods here - to make sure they know the cheapest way to send out their stock or to keep track of it en route to the customer, products that pay back the cost of installing them so quickly that these will be the first on businesses' shopping list when IT spending returns. The alternative view is that such consumer-focused companies will be the last, not the first, to restart IT investment.

Kewill shares, off 2.75p at 62.75p, are too risky.

Wetherspoon gives no cause to celebrate

For someone who walked out suddenly in September to start a six-month sabbatical, professing a long-suppressed desire to travel, JD Wetherspoon's chairman, Tim Martin, doesn't seem to have gone very far. Yesterday, he was at home in Essex keeping an eye on the latest news from the pubs group he founded 24 years ago.

After expanding to more than 650 outlets - with their distinctive mix of cheap beer, quality grub and no music - the group appeared to have lost its way and has now completed a subtle shift in emphasis. Expansion plans have already been halved to about 35 outlets a year, and yesterday Wetherspoon said it is in talks to sell a further 10 sites, on top of 18 already "pruned". The new sites are likely to be sold at about £3.5m below the value at which they are in the books, which is a little alarming, and makes you wonder if the company should be depreciating its assets faster (thus cutting reported pre-tax profits).

The other worry is the erosion of profit margin. Because overheads in the pubs industry are so high (and the National Insurance hike and minimum wage are a big deal), the 0.5 per cent decline in margins in the past three months is financially more significant than the 4.2 per cent rise in like-for-like sales. Although Wetherspoon has diverted cash from new openings into share buybacks, a price-earnings multiple of 14 and a dividend yield of 1.5 per cent make the shares (267p) look too expensive.

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