Froggatt has more to do at S&N

Don't mop up Bunzl as dollar hits profits; New improved Provalis is still failing the blood test
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The Independent Online

Tony Froggatt, the new(ish) chief executive of Scottish & Newcastle, evidently meant business when he promised in December to up the group's profile among British drinkers: its newest concoction, Bliss, is sponsoring the latest series of Footballers' Wives. Appropriately for a TV show that has popularised Chardonnay as a woman's name, the new drink blends the grape itself with any one of a number of fruit juices.

Bliss, like S&N's more established brands such as Foster's and John Smith's, is to benefit from an extra £15m the company intends to spend on advertising in the UK this year, and a further £20m slated to follow in 2005. All part of Mr Froggatt's attempt to put his money where his mouth is, after lambasting the brewer's investment track record in terms of its advertising and promotions budget just two months ago.

The investment could hardly come soon enough for City analysts, many of whom do not share Mr Froggatt's passion for S&N's brand portfolio. Some reckon the group must more than double its marketing spend to £150m over four years just to catch up with rivals such as Heineken. S&N's plan to trim £45m in costs over three years should yield some of that money.

The extra ad spending so far does seem to be influencing people's drinking habits, even if it means S&N's operating profits are flat. Its top four brands - Foster's, Kronenbourg 1664, John Smith's and Strongbow cider - grew 6 per cent in volume terms in the last two months of 2003, compared with the same period in 2002, reversing a decline.

The improving sales trend at its core UK business was particularly welcome after a catalogue of self-induced errors, mainly linked to distribution.

Overseas, the picture for 2004 looks mixed, with western Europe unlikely to reap the thirst-quenching benefits of last year's heatwave, although volumes in Russia (served through the BBH joint venture) will continue to grow.

This column's previous decision to back S&N some 18 months ago left investors nursing a hangover. Those who bought in then may as well hang on to the shares, but with most of the good news priced in, there will be better times to buy.

Don't mop up Bunzl as dollar hits profits

Bunzl has made its shareholders a lot of money from the mundane business of supplying supermarkets and caterers with plastic packaging, carrier bags and mops and buckets. Its customers find it a useful one-stop-shop for these sorts of everyday consumables.

The company is now a stalwart of the FTSE 100 and is hoping to embark on its biggest acquisition for years, with a £500m-plus bid for a private European rival, Autobar. Although Bunzl will no doubt proceed with its characteristic caution, the City wants the company to triumph in the hotly contested auction, because it needs to pep up its short and medium-term prospects.

Plastics and other bulk products face perennial downward pressure on prices, threatening to whittle away Bunzl's turnover and the value of its mark-ups on products. And since 62 per cent of Bunzl's business is in North America, the falling dollar is constraining the sterling value of earnings. Every lost cent against the pound knocks £800,000 from profits, the chief executive Tony Habgood said yesterday. Analysts have been downgrading forecasts for 2004.

Without an acquisition it seems only share buy-backs will keep earnings growing this year.

Behind the translational effects of currency moves, Bunzl's businesses are steadily building market share, at least. Yesterday's full-year figures showed turnover up 6 per cent at constant currency rates. Better still, operating profits were up 10 per cent, showing that Mr Habgood is still adept in squeezing cost savings - both in the main services business and in the smaller Filtrona operation which makes cigarette filters.

But now is not the time to be buying Bunzl. At 446.75p, the shares trade on about 15 times sterling earnings, which looks fair, maybe even a bit toppy. The dividend, meanwhile, was 12.1p for 2003 and could be 13p this year, yielding a respectable but unspectacular 3 per cent.

Hold.

New improved Provalis is still failing the blood test

If at first you don't succeed, move on. Provalis, whose foray into biotechnology ultimately failed to yield the promised range of new vaccines, launched an innovative diabetes blood testing kit for use in doctors' surgeries with much fanfare two years ago. Despite there being 9,000 of the products in clinics now, sales of the testing cartridges have plunged. The system has not impressed users, who want something easier to administer. Provalis said yesterday that income from the testing business collapsed to £600,000 in the last six months of 2003, from £1.6m a year before - and its shares fell 16 per cent to 8.5p.

So it is time for the company to move on, to focus on a second- generation version, called G5, which will be launched in the autumn and which is more fully automated. Some analysts hope for a boost to the shares if Provalis signs a distributor for G5 soon, but investors might by now be weary enough to want to wait for real sales numbers next year.

The cash cow inside Provalis, enabling it to ride out longer and wider than expected losses, has been a drug marketing business, which beat expectations yesterday. The trouble is that a big chunk of sales will disappear at the end of the year when one of its ranges is discontinued. It will be expensive to replace it with a new distribution deal.

The profit that was promised within months when we tipped the shares back in 2001 seems further away than ever. Sell.

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