Investment Column: Don't rush to stub out Gallaher
Ailing mail order group N Brown is best avoided; Dimension Data looks programmed for growth
Thursday 13 May 2004
It is pretty simple to make money when your customers are addicted to your product. As a result, tobacco stocks are never likely to run out of puff. Stock market fashions may ebb and flow but the cash keeps rolling in, dividends keep rolling out to shareholders, and groups such as Gallaher have plenty of firepower with which to go adventuring in the new markets which are opening up out east.
Gallaher, the company behind the Benson & Hedges and Silk Cut brands, said yesterday that it had sold 18.2 per cent more cigarettes in the first three months of this year than it did in 2003, thanks to a big marketing push in Russia and other former Soviet Union countries. In Kazakhstan, it has captured more than a third of the market.
The entry of 10 new member states to the European Union will mean more of the cheaper cigarettes coming back west, which could prove another threat to Gallaher's entrenched positions in countries including Germany, Ireland and the UK. Sales in these markets are already eroding as a result of punitive duties on cigarettes, stringent advertising rules and, increasingly, bans on smoking in public buildings. No wonder Peter Wilson, Gallaher's new chairman, was moved to tell shareholders at the company's annual meeting that "smokers shouldn't be discriminated against" and that Gallaher is "committed to bringing balance and a sense of proportion to the public debate on smoking".
The important thing for investors is that Gallaher is pushing into emerging markets more quickly than it is suffering declines in the West, and so it is. Russia is its single biggest market by volume, and it is having some success in persuading smokers to trade up to its more expensive brands. It is also ahead of the pack in China, where it has a joint venture to distribute its Memphis brand in this most populous market.
Worries over the economy have pushed investors into defensive sectors in recent weeks, making Gallaher shares look toppy again but, with a dividend yield of just under 5 per cent, it is a solid hold in any climate.
Ailing mail order group N Brown is best avoided
Who would be a traditional mail order retailer? Recent months have seen the former pioneer GUS exit this old-fashioned market, which shrunk 7 per cent last year.
Companies such as Next, which has a thriving catalogue business, rely on a high street estate to persuade customers to order from its directory. The shops provide a useful dumping ground for all those outfits that looked better on the page than on the body. N Brown doesn't have the luxury of a store network. Alan White, the chief executive, thinks that by marketing to the older, plumper woman the company could thrive. But scores of high street retailers cater for just that market.
N Brown's vulnerabilities were highlighted by last year's postal strike. Rising bad debts - many of its customers rely on its credit options - also hit its bottom line. Mr White hopes his attempts to tap the e-commerce and TV shopping market, the latter via a joint venture with Richard Desmond's Northern & Shell group, will make up for flagging mail order sales. But this is a real stab in the dark.
Although sales of clothing and footwear have risen 2 per cent in the past 10 weeks, N Brown's crackdown on riskier credit means home and leisure sales are down 5 per cent. It plans to sell its TV rental business and will take a £9m charge to cover the anticipated losses.
The shares, down 4.75p at 115.25p, have had a rough time since this column recommended avoiding them 18 months ago at 157p. Any investors still hanging on to the stock should sell.
Dimension Data looks programmed for growth
It has been downhill all the way for the technology group Dimension Data since its float in 2000 - when it briefly enjoyed FTSE 100 status before the crash that brought it, and its peers, back to earth.
However, yesterday it was celebrating a return to profit in the six months to 31 March. Although the cheers were somewhat muted, an 8 per cent increase in sales to $1.2bn and operating profit of $9.9m versus a loss of $4.5m on the second half of last year is real progress.
Anyway, this might be the stock for investors still looking for some exposure to the recovery in technology spending. But what does Dimension Data do exactly?
Part of its attraction is that its interests are spread both internationally and operationally. Its core business is basically hand-holding. It will build for corporate clients their IT networks, putting together all the servers and other bits of kit sourced from a host of different suppliers. It then looks after the network, upgrading it when necessary and integrating new technology as and when.
Growth areas for Dimension Data include offering the same clients data storage and back up facilities. Over the past 12 months the shares have risen from 17p to 33p, but don't be spooked by an earnings ratio for next year of 26 times. This should be a long-term winner.
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