Investment Column: Primark gives AB Foods a boost

NETeller is well worth taking a gamble on; Overcapacity is spoiling the outlook for St Ives
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The Independent Online

When Peter Jackson goes for his weekly supermarket shop, he swells with pride to see that, these days, Ryvita is not just a tatty looking box on the bottom shelf, but rather takes up a whole section for its range of different flavoured crispbreads. This apparently staid old brand has increased its sales by 18 per cent in the past month.

When Peter Jackson goes for his weekly supermarket shop, he swells with pride to see that, these days, Ryvita is not just a tatty looking box on the bottom shelf, but rather takes up a whole section for its range of different flavoured crispbreads. This apparently staid old brand has increased its sales by 18 per cent in the past month.

Mr Jackson loves all the brands and all the companies inside AB Foods. His most significant acquisitions while chief executive have included Twinings, which has been expanding its range of teas, and Ovaltine, which has become a favoured drink in many countries in Asia and is on the verge of cracking China.

And Primark was the star performer in yesterday's interim results. The discount retailer increased profits to £50m from £42m last time.

Yes, a chain of clothing shops coexists in the same company with grocery products including Kingsmill bread, and with more basic food ingredients such as sugar and flavourings. Making it even more unfashionable, the company has been sitting on more than £1bn of cash while it continues it long search for substantial further acquisitions. I won't be rushed, Mr Jackson says, and for the most part investors are ready to trust his judgement. It does seem, though, that he is willing to dip into the cash pile to fund expansion of Primark and other businesses if necessary, and there are still rumours of a share buyback.

So what could rock this rock-solid business? Not much. The European Union is going to liberalise the sugar market, reducing the subsidies that have propped up prices and benefited AB Foods for so long. Yet this liberalisation may be less dramatic than many lobbyists hope. There was also a warning that commodities prices could continue to be volatile (and the rising cost of maize corn has hit the profitability of Mazola cooking oil, which is made from the crop), but it seems as though the relevant harvests have been benign.

The shares, approaching record highs, are valued on 14 times earnings, which looks appropriate. Keep buying.

NETeller is well worth taking a gamble on

NETeller IS not to be confused with a hazelnut spread. It is not, either, to be confused with a loss-making dot.com of any sort. The company is an e-wallet, a place for gamblers to stash their cash ahead of wagering it on any of the internet's proliferation of gaming sites. It is also hugely profitable.

The company takes over the risky and expensive business of verifying users' identities and checking for credit card fraud - so the gambling sites are happy to accept cash from NETeller accounts, and pay a percentage fee to do so. NETeller is expected to make $44m (£25m) profit this year, valuing the shares - which debuted on AIM yesterday as the company raised £30m - on 12 times likely earnings.

That is cheap for a company which is growing exponentially in a market which is also growing at a rate. Some industry pundits reckon the number of online gamblers could double by 2006.

There are genuine reasons as to why the flotation has been received lukewarmly by institutional investors. The company is operating in some legal grey areas, to say the least. Some US states are trying to stamp out offshore internet gambling by pursuing the credit card companies which fund them, so NETeller won't be long out of their sights. It is also yet to get a stamp of approval from the UK regulator that will allow it to expand seriously in Europe.

An additional risk is the execution risk of its expansion plans (into new industries such as online broking or pharmacies) and acquisitions. So this is not one for widows and orphans. It is, however, one for gamblers to buy.

Overcapacity is spoiling the outlook for St Ives

St Ives, the printing group, continues to suffer from "extremely challenging" trading conditions. No underlying profit growth is now expected for this financial year.

Unlike your common printer, St Ives specialises in high quality time-sensitive work, requiring top facilities. Its customers are giant companies but it has been hit by the economic downturn. For instance, it said that in the UK and Europe corporate finance market (merger documents etc) "pricing has reached unsustainable levels" - unsustainably low, that is. The problem is industry overcapacity rather than company-specific.

St Ives, which operates in six markets - books, direct response, financial, general commercial printing, magazines and multimedia - said demand for books was steady. The other markets were weak.

Due to exceptional charges of £22.1m (it closed one of its sites during the period), including goodwill impairment of £13m, there was a loss before tax of £5m for the six months to 30 January - from a pre-tax profit of £15.2m last time. "Underlying" pre-tax profit was up 2.6 per cent to £17.1m but, crucially, turnover was 6.3 per cent lower at £208.8m.

The shares, which closed at 384.5p yesterday, trade on a forward multiple of 17, which is too high, given the poor prospects. Avoid.

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