SABMiller too frothy for now
Uncertain chapter for Euromoney publishers; FKI's engineered a great comeback
Friday 21 November 2003
The jury is still out on last year's controversial £3.6bn takeover of Miller by South African Breweries - but the market is already betting on a not guilty verdict.
There were some undeniably good results from the combined SABMiller yesterday. The group has an impressive spread of interests across the globe, and European brands including the Czech Pilsner Urquell and Miller Genuine Draft in Russia performed exceptionally well. Together with the benefits of currency movements (notably the strengthening South African rand), earnings in dollar terms were up a stonking 55 per cent in the six months to September. There was even optimistic noises on the troublesome central American soft drinks business, where the arrival of Pepsi has increased competition and taken the fizz out of profits.
However, the audacious merger stands or falls on the management's ability to put their talents successfully to work on Miller. This is a brand that has lost its way in the US, where it is number two to the mighty Budweiser, and volumes in the half-year were down 6 per cent. No sign of things getting better. Indeed, the company has warned investors it will take three years to turn things around. It has made a start by launching ad campaigns that talk up Genuine Draft's unique flavour or Miller Lite's low-carbohydrate attractions. There will also be efforts to incentivise managers and improve distribution. Many think the recovery is a shoo-in, but Miller is a heavier beer than Bud and drinkers' tastes may just have changed. In a flattish US beer market, SABMiller has plenty to prove.
If one is accentuating the negative, the slower growth affecting the mid-market in Russia may soon extend to the premium beer market SABMiller operates in. Then there is the company's dependence on the ex-growth South African market. And Miller's former owner, Philip Morris, still holds 36 per cent of the shares and may start to dribble them on to the market from 2005.
We were not believers in the merger at the time but we did miss a trick when repeating our "avoid" advice in April. Now on 14 times current year earnings, SABMiller shares look too expensive again.
Uncertain chapter for Euromoney publishers
Euromoney Institutional Investor, the publisher and conference organiser majority-owned by Daily Mail & General Trust, has found it tough to attract advertisers to magazines such as Institutional Investor and Latin Finance while investment banks have been in the doldrums.
Shareholders had hoped that the end of the bear market might change that but, after an uptick in sales in September, the next three months look like being flat or slightly down. It might take until the New Year, and new annual marketing budgets inside the big banks, for renewed inquiries to translate into sales. Analysts did a prudent pruning of forecasts and the stock fell 6.5p to 370p.
The conference business is already more verdant, though, as is the training unit, which conducts professional training for lawyers and bankers.
There's a new worry: with DMGT examining an audacious bid for the Telegraph newspapers, investors suspect it may sell down its stake in Euromoney. There are plenty of other assets (notably in radio) that DMGT would most likely sell first, but it is an uncertainty to be borne in mind.
The shares are back above where we said "hold" 18 months ago and the stock, though fully priced as a multiple of current forecasts of earnings, does have upside as the recovery develops. Hold.
FKI's engineered a great comeback
The word "diversified" hardly begins to do justice to FKI. The engineering group is a big sprawl of businesses. It makes thousands of products, from chains and conveyor belts, to hinges and wind turbines, to whole warehouse systems. It employs 14,500 people in 50 countries. And, bizarrely, it is currently conducting 67 strategic reviews.
Paul Heiden is 10 months into the job of chief executive and has asked managers at 67 divisions to, in effect, justify their division's existence within the group. FKI's future shape and direction will finally be elucidated by Mr Heiden in January, but don't expect fireworks, maybe just a nip and a tuck in the portfolio.
So the real story at FKI is the state of the global economy. The half year ended 30 September was weak, of course, and profits collapsed to £7.4m from £25.6m the year before. The shares fell 6p to 106p not because the figures were worse than feared but because Mr Heiden felt unable to be as upbeat on the future as some of his peers. Difficult but stable, was his assessment.
Mr Heiden has already "rebased" (i.e. cut) the dividend and managed to squeeze relatively more cash from across the group, thanks to a steady trickle of job cuts and other efficiency measures. So FKI is edging away from the abyss into which it looked last year, when it came uncomfortably close to breaking promises it had made to its banks.
We said the shares were not worth pursuing when we last wrote on them last October and they continued to fall until April. Now, though, the environment is much improved. FKI's factories are running at barely two-thirds capacity, so it can easily take on much more work. Sales growth, when it comes, can feed through very strongly to profits. Buy.
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