Healthy recipe for growth at AB Foods

WH Smith figures reveal more scars; High debt levels make Ronson one to avoid
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The Independent Online

Life is sweet for Associated British Foods. The food empire, built up over 30 years by the late Garry Weston, spans sugar production, oils and other cooking ingredients, a string of household food brands and – bizarrely – the Primark clothing retailer. Aside from a little local difficulty in Australasia, trading is now looking very healthy across the empire.

The performance of its grocery division – maker of Ryvita crackers, Kingsmill bread and Silver Spoon sugar – was one of the stars yesterday. The growth of Twinings tea, now available in an inconceivable number of flavours and formats, helped the division grow profits by 25 per cent. Some sound acquisitions, including a cooking oils business from Procter & Gamble, have bulked up other divisions, too.

Management squeezed efficiencies out of the main businesses, in particular British Sugar. In recent years the number of factories has been reduced from 13 to six, yet it is still producing roughly the same amount of sugar. The closure of two factories last year boosted margins.

There is still the matter of the £900m cash cushion. Peter Jackson, the chief executive, insists he is not simply sitting on his behind, but is out looking for acquisitions to boost shareholder value. It is a shame he hasn't found any significant ones recently, since the low interest rates of the past six months meant investment income was just £23m, compared to £33m in the same period the year before. But Mr Jackson's insistence that he will not overpay for any business is admirable, and there is no harm in an embarrassment of riches, at least in the short term. The company has already shown itself willing to hand back some cash if there really is nothing to be done with it.

Similarly with Primark. The cheap and cheerful clothing retailer – part of AB Foods' retail and packaging division – is more than holding its own on the booming high street. Like-for-like sales over the period reported yesterday were 4 per cent, with a grim autumn made up for by the great Christmas. The group is actively looking for bigger stores and, with only 111 outlets and no presence in Birmingham, Liverpool or Leicester, has plenty of scope for expansion. Eventually, no doubt, it will be sold, but there was no sniff of any plans to do so yesterday.

The cash mountain accounts for about a fifth of AB Foods' market value, leaving the rest of the business on a rating of about 12 times this year's forecast earnings. While the Weston family continues to control the business, it will remain undervalued, but its resurgent trading prospects make the stock a solid hold.

WH Smith figures reveal more scars as profits slip 10 per cent

The last six months have not been kind to WH Smith. The events of 11 September blew a huge hole in the retailer's US operations, which include stores in airports and hotels. The result was a profits warning in January and the closure of 25 branches.

Yesterday's interims showed further scars with pre-tax profits for the six months to 28 February down 10 per cent to £90m. There were also £43m of exceptional charges including £27m related to stock write-offs in the US where fashion items such as T-shirts went unsold.

On top of this, Richard Handover, the chief executive, was forced to abandon the sale of the news distribution division last year after the buyers dropped their offer price at the last minute. The saving grace has been the UK operation, which performed strongly. It enjoyed like for like sales growth of 6 per cent thanks to strong sales of entertainment products such as DVDs.

Though the worst might now be over, the worry is that three of Smith's main divisions – UK Retail, US Retail and news distribution – are facing an uncertain outlook.

In the US prospects are certainly improving after a £12m loss in the first half. Like-for-like sales are down 8 per cent on last year in current trading, compared with minus 18 per cent during the first half. But while the airport stores are recovering well the hotel outlets are still struggling. Mr Handover says that he is committed to keeping the US operation but the shape of the business may need to be changed if fortunes are to be improved.

There are new concerns about the previously robust UK business. Underlying sales growth has fallen to 3 per cent in current trading compared with 6 per cent during the first six months. Smith's says a slowdown was inevitable after a booming Christmas, but the figures still spooked analysts.

And in news distribution there are regulatory worries as the code of practice for newspaper wholesalers is reviewed. Smith's says it does not anticipate any changes but they cannot be ruled out.

Smith's is a more solid business under the current management team but concerns over the trading outlook knocked more than 5 per cent off the shares yesterday. Assuming full-year profits of £120m the stock trades on a forward p/e of 13. Avoid.

High debt levels and hint of increased borrowing make Ronson one to avoid

Ronson, the cigarette lighter maker, has long been a colourful member of the stock market undercard. The little company fell on hard times in the Nineties after a string of failed acquisitions and product launches. Victor Kiam, the flamboyant US businessman who liked Remington shavers so much he bought the company, was chairman from 1998. During that time the stock was a favourite of spivs and day-traders chasing the latest rumour as Kiam planned to extend the Ronson brand into some technology venture or other.

In the end, a string of no-hope e-business ventures had to be aborted, but John Graham, the managing director, has knuckled down to concentrate on selling more and brighter lighters. There has been considerable progress in 2001, with turnover up 24 per cent to just shy of £9m. The company even turned 2000's £1.6m loss into a £384,000 profit. The gains have been made by improving distribution and cutting manufacturing costs. A deal to supply the disposal lighters sold at Tesco is one recent highlight.

But the finances of the company are still a long way from robust. There was a net outflow of cash last year that dwarfed its bottom line profits, and it is not clear that can be reversed this year.

It is difficult to see the case for holding Ronson shares. About 60 per cent of turnover is from cheap disposable lighters, and the company is already a big player in the mature UK market. While there could be significant growth opportunities abroad, the field is competitive.

The company is pinning its hopes on a number of new products, including a child-proof lighter and a refillable, trendy lighter, costing about £1 and aimed at youngsters. For those who are sceptical that lighters will become a fashion accessory for the young, the company counters that it is also entering the cigarette papers market, where it believes it can win market share. It launched these just a few weeks ago, and promises a new king-size roll-up aimed at students for later in the year.

The company still hopes to exploit the Ronson brand – a significant asset, particularly in the more expensive gift lighters area – with new, unrelated products, but has this time promised to move more cautiously. There were no indications yesterday on what areas are being considered.

With Ronson admitting that debt levels are high and hinting that it could increase its borrowings this year to finance the group's recovery, the shares – which have already tripled in less than a year – are unattractive. Avoid.

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