Time to lock in profits at Punch

Wait for the thaw at Northern Foods; School run comes to halt for Nord Anglia
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The Independent Online

Punch Taverns has come a long way since its flotation on the stock market in 2002 with the shares now nearly double their 230p float price.

Buying Pubmaster last autumn for £1.2bn increased the size of its estate by some two thirds to about 7,400 pubs. It has plans to dispose of 252 pubs to keep the regulators happy.

In a trading update, it said yesterday that both businesses are performing well, although there were only figures for the Punch estate. In the 16 weeks to 13 December, its like-for-like turnover growth was 2 per cent.

No doubt it has been helped by its focus on suburban/community locations which are said to be favoured by punters over the high street. Only about six per cent of Punch's estate is in high street locations.

There are, of course, risks. While the company says the integration of Pubmaster is progressing well, the sheer size of the deal means it will not be easily swallowed.

Changes in licensing regulations are also likely to result in increased costs for Punch, although it does not believe they will be meteoric. Submitting floor plans for its entire estate, for example, will cost about £1m.

Punch trades on a discount to Enterprise Inns, which is larger and has been around longer. Analysts predict Punch will make a profit of around £150m this year, giving earnings of about 46p a share which puts the stock, up 3.25p at 448.25p, on a multiple of about 9.7 times. That compares with about 11.8 times for Enterprise Inns.

In addition, after the US private equity firm Texas Pacific sold its 21.8 per cent in the business last year, the share overhang has been largely removed. Venture capital firms now own less than eight per cent of Punch.

Shares in Punch have rallied hard since this column recommended them a buy last spring and will benefit if Enterprise creeps into the FTSE 100 index.

There is also potential for Punch to close the valuation gap with Enterprise Inns, although investors benefiting from the steep share price rise might be wise to lock in some profits.

Wait for the thaw at Northern Foods

The time-poor, cash-rich generation has made the market for ready meals a rapidly growing one. But Northern Foods, the UK's largest supplier of chilled and frozen foods to supermarkets, has been left on the shelf this year.

Its biggest problem has been the rising cost of raw ingredients, mainly due to the strength of the euro, and the company has not yet been able to recoup its margins. Food materials inflation has risen 2.5 per cent, but Northern has clawed back only 1.5 per cent of that inflation through cost cuts and price rises. It was also hit by the hot summer, when demand for frozen pizza and oven-bake lasagne disappeared. The chief executive resigned in September after a profits warning and there has been some uncertainty since then.

The company said yesterday sales were holding up in the third quarter, up 3.5 per cent on the same period last year, compared with a 1.5 per cent rise in Q2.

Northern has also sold off some divisions, such as Fox's Confectionery and Baxter's canned foods. More disposals are likely.

At 143p, the shares are trading at 10 times forward earnings. Not expensive, then, and the dividend also yields a tasty 6.5 per cent. But profits are still lower in Q3 than this time last year, so Northern has to work hard to meet its flat second-half profits target.

The new CEO is crucial to its future. Patricia O'Driscoll, who ran Shell's forecourt retail outlets, comes on board in April. Hold until then to see if Northern is past its sell-by date.

School run comes to halt for Nord Anglia

Nord Anglia is in the controversial and politicised world of educational provision, but that does not mean it isn't a good market to be in.

The company works with both state and private schools and nurseries, providing teaching and administrative support. It also provides educational services to institutions such as the army and prisons.

In a trading update yesterday, ahead of interim results, the company flagged up decent progress and good prospects for this year. It pointed out that it had £10m cash on tap, after a fundraising and a sale of one of its schools - it flogged Hull Grammar School for £4.2m.

The company insists the Hull deal does not diminish its commitment to its schools business in the UK.

Also yesterday were further appointments to bolster its outsourcing/contracts division, which the company is beefing up to have a better chance at acquiring bigger contracts.

There is much to go for in this market. Nord Anglia said it is currently competing for "substantial" contracts with the Home Office, Department for Education and the Ministry of Defence.

The company is moving away from the facilities/payroll management end of this market, after discovering this did not provide good returns. It must be right to concentrate on the actual business of education.

Nord Anglia shares have more than doubled in the past 12 months, leaving the stock - at 255p - high enough for now.