Rexam proving a canny buy
Acquisitions can drive Lookers' profits up; Hold CMG while the risks are still high
Friday 30 August 2002
Will the tin can rally continue? Rexam, the world's largest maker of drinks cans, which counts Coca-Cola among its blue-chip customers, has bucked the bear market and looks set for further gains.
The company fell into the red in the first half of the year with a £147m loss. The negative result was produced by a stack of exceptional charges linked with a disposal programme as Rexam slimmed down to focus on consumer packaging.
That lengthy process is complete and Rexam, the former Bowater conglomerate, is now a very different beast. It has raised £794m from selling non-core assets to reduce debts after the £1.5bn acquisition two years ago of American National Can.
Strip out the £250m of one-off charges included in the interim figures, mainly writing off goodwill on the disposals, and Rexam's results impressed. Underlying profits rose 30 per cent to £134m as turnover grew from £1.56bn to £1.58bn.
The chief executive, Rolf Borjesson, put the strong growth down to the higher prices it has achieved for drinks cans in the US, up by 5 per cent in the six months to 30 June. The price recovery in the US came without a reduction in volumes and there should be more to come. Mr Borjesson hopes for an extra 4 per cent this year and 1 per cent in 2003 on annual sales of about £1bn.
The only real disappointment came in the plastic packaging business where demand dropped after 11 September as consumers cut purchases of pricey perfume and make-up, particularly in airport duty free shops. That led to customer destocking and delayed product launches. Rexam reckons, however, there will be some recovery in sales, profits and margins in the coming months.
Despite the blip, analysts were impressed and ABN Amro lifted its full-year profit forecast by 4 per cent to £269m. Investors who followed our tip a year ago to buy Rexam shares – down 26p to 437.25p yesterday – have made a tidy profit of roughly £1 a share, but there should be more to come. The shares are on a forward price-earnings ratio of just 11, and are worth buying.
Acquisitions can drive Lookers' profits up
Good looking business, Lookers. Everything has appeared to come together for UK car dealership businesses in the past year. New car sales are up more than 6 per cent on a year ago, thanks to a combination of low interest rates and the success of the Rip-Off Britain campaign which shamed car makers into offering lower prices and better deals on their vehicles.
Add to that a flurry of consolidation which has pepped up share prices in the sector, and it is little wonder Lookers has had such a strong run.
But members of the management team deserve credit, too, since they run a tight ship and have set ambitious goals. Operationally, they want profits from after-sales services to cover the overheads on the rest of their dealerships. Strategically, they plan to double the size of the business and bankers and shareholders have already agreed to back significant acquisitions. The hunt for such purchases is increasing in importance now a change in European competition rules means bigger dealership groups will have greater power at the expense of the car makers. If Lookers succeeds in bulking up, it can continue to grow profits strongly; if it fails, it will undoubtedly attract a predator. Either way the shares, down 6p to 185.5p are worth holding.
Hold CMG while the risks are still high
André Agassi and Steffi Graf's multimillion-pound advertising campaign for picture messaging is just the start of the roll-out of these new mobile services. There is a lot of money riding on their success, not least for CMG, the Anglo-Dutch group whose software powers this new generation of services for some of the world's biggest mobile operators.
So might it now be time to buy back into CMG shares? It is tempting, given the stirrings of a rally that have appeared to develop in recent days, and the 19 per cent rise yesterday to 77p, when the company revealed its mobile messaging software division had moved unexpectedly back into profit.
But the surprise profit was more to do with early shipments of software to Hutchison, which is setting up the first third-generation mobile network in the UK. CMG warned it won't be making any more sales overall than had previously been expected. In fact, traditional text messaging software remains a tough market, even after some of the overcapacity of the boom years has been worked through.
And then there is the bigger IT services arm of CMG, which accounts for 80 per cent of group sales. All of the Netherland's big banks are customers, and many government departments, too. In common with others, CMG has been focusing its sales effort on the public sector as the economic slowdown means stagnating sales elsewhere. But the key phrase is "in common with others"; competition for government contracts is suddenly fierce, and there could be pressure on margins.
So the risks are still high, despite CMG's sterling efforts to cut costs. On 14 times forecasts of this year's earnings, the shares are only a hold.
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