Dr Pepper a tonic for Cadbury
THE INVESTMENT COLUMN
Thursday 07 September 1995
Bottling plants in America would turn their backs on Dr Pepper after pressure from the market leaders, it was feared.
Those who shrugged off those concerns pointed to the grim precedents set by other British companies which had come a cropper in the US - Marks & Spencer with Brooks Brothers, United Biscuits with Keebler and Midland Bank with Crocker.
But six months down the line, the enlarged Cadbury is in good shape. The first set of figures to include the Dr Pepper deal show pre-tax profits for the six months to June up marginally to pounds 206m, after pounds 30m of re-structuring costs relating to the US deal.
Even stripping out the Dr Pepper performance, sales from existing businesses were up from pounds 1.7bn to pounds 1.8bn. Both the beverages and confectionery divisions increased volumes by 5 per cent, with margins also improving.
The integration of Dr Pepper is going quite as well as could be expected. A new US management structure is in place and the 7-Up brand is being revitalised to do battle against Coca Cola's Sprite.
Dr Pepper is also being expanded internationally. Mexico is an obvious market and the UK will be targeted for increased distribution from January.
Unlike many food companies, such as Hillsdown Holdings which reported earlier this week, Cadbury seems to have been a net beneficiary of the summer heatwave and coped better than most with rising raw material prices. Though Cadbury was not being specific yesterday it says summer sales of drinks rise faster than the decline in chocolate sales in a heatwave.
Cadbury's only problem with soft drinks is that it had already started promotions to the grocery trade which meant that though volumes were up, profits did not rise in proportion.
New adult drinks such as Oasis, a still fruit drink, and Schizan, a "new- age" herbal product, are exceeding forecasts. Though Cadbury is under pressure from supermarkets' own-cola brands such as Sainsbury's Classic, it says it will have grown its soft drinks market share in six of the top seven grocers.
Raw material costs, such as milk, sugar and packaging , have risen by 6.7 per cent in the first half and the rise will get worse in the second.
But Cadbury is attempting to absorb the costs through increasing volumes rather than passing them on in higher prices.
The company is also investing heavily in emerging markets, particularly Russia and Poland where new plants are coming on stream - around pounds 150m will be invested over a three-year period.
All of that all adds up to a pretty impressive story and brokers are forecasting profits of around pounds 535m for the full year, up from pounds 478m last time. With the shares up 4p to 496p yesterday, they stand on a forward rating of 15 and still look attractive.
from the pain
This year marks a turning point in the reconstruction of BBA under Roberto Quarta, the chief executive who arrived from BTR in November 1993.
Having spent the first year or so clearing out a rag-bag of businesses ranging from aircraft interiors to the world's biggest maker of fire hoses, Mr Quarta is now ready to build on the remaining brake linings to industrial textiles operations.
Yesterday's half-time results suggest that those foundations are firmer than for some time.
Pre-tax profits jumped from pounds 23.4m to pounds 33.8m in the six months to June and a 20 per cent uplift in the interim dividend to 1.8p marks the first increase in the payment to shareholders since 1989. The figures were scarred by Mr Quarta's surgery - goodwill write-offs led to a pounds 26.7m exceptional loss. But the pain has been worth it.
This year should see the end of the disposal programme, ahead of schedule, while Mr Quarta has delivered on his promise to raise margins into double digits 18 months early - they rose from 8.4 per cent to 11.3 per cent in the latest figures.
Admittedly, Mr Quarta has had a fair wind from the market. BBA's dominance of European brake linings meant it benefited fully from a 30 per cent rise in UK demand in the first half and a strong 15 per cent increase in mainland Europe. Meanwhile, the US was a good market for BBA's Reemay plastics operation.
More important to the group's future prospects is where the reconstruction takes it from here. A start was made earlier this year when a break-up bid for Holvis, a Swiss conglomerate, left BBA, in effect, paying a net pounds 123m or so for Fiberweb, a plastics business in areas as diverse as nappies and industrial filters.
It is early days yet, but no skeletons have been uncovered thus far and the prize of tripling margins at Fiberweb to bring them closer to the existing Reemay operation in the US remains in sight. And with gearing expected to be no more than 22 per cent after the Holvis and other recent deals, Mr Quarta has plenty of scope to grow in new areas such as Latin America and the Pacific Rim.
Good trading news then, but the shares, up 1p to 272p, are already discounting all this and more on a forward price-earning ratio of close to 17, based on NatWest's forecast that profits will hit pounds 123m this year. Hold.
little to excite
The 3p rise in Amec's share price to 62p yesterday was tellingly tentative, given the market's relief that the company had finally settled a potentially costly North Sea contract dispute. Investors may have stopped worrying about the contractor's financial risk, but interim figures confirmed that the industrial doubts and the yawning gap between the company's self- confidence and reality are as big as ever.
Pre-tax profits of pounds 6.1m were a third lower than in the first half of 1994 and a still totally unacceptable return on sales of pounds 1.13bn - barely 0.5p of profit for every pound received from the company's clients.
Sir Alan Cockshaw, chairman, is right to boast about the company's skills base, but in the current UK construction market technical ability is no guarantee of a sensible reward. Like Wimpey, Amec is giving up traditional low-margin contracts and concentrating on (hopefully) more lucrative design and build work.
It is also expanding its already extensive overseas contracts, a sensible strategy but hardly a profitable one so far - an aggregate loss of pounds 100,000 from foreign sales of pounds 300m is hardly a comforting counter-balance to the dismal domestic market.
Housing is as weak as contracting, with a pounds 300,000 profit once again hardly worth the effort of building and selling pounds 83m worth of Fairclough houses. Unlike BICC, which is wisely concentrating on its core and abandoning its small homes arm, Amec is determined to press on.
Having said all that, it is possible to construct a bull argument for Amec's shares. Thanks to a relatively high fixed preference share bill each year, generating a small rise in profits would lead to a dramatic rise in earnings per share. On traditional p/e measures the shares could look quite cheap on the basis of forecasts two years out.
The shares also benefit from a yield of 6 per cent, which the chairman appears to have staked his reputation on maintaining. That, however, is the only concrete attraction and the shares, which have underperformed the market by more than 50 per cent over the past year, will continue to languish.
Turnover Pre-tax EPS Dividend
AMEC (I) 1,133m (926m) 6.1m (9.1m) 0.2p (1p) 1.5p (1.5p)
BBA (I) 605.3m (711.1m) 33.8m (23.4m) 8.3p (5.2p) 1.8p (1.5p)
Cadbury Schweppes (I) 2,025m (1,768m) 236m (205m) 13.7p (11.72p) 4.9p (4.6p)
Everest Foods (F) 39.6m (6.9m) 4.25m (1.1m) 4.23p (3.23p) 2.6p (1.3p)
Henlys Group (I) 214m (199.5m) 10.6m (8.5m) 15.8p (14.5p) 4p (2.5p)
Iceland (I) 655.4m (621.5m) 33.6m (32.1m) 7.89p (7.6p) 1.65p (1.32p)
Independent News (I) IR167.5m (IR96.5m) IR20.4m (IR15.2m) 10.05p (9.28p) 3.5p (3p)
NFC (Q3) 2,035m (1,518m) 22.4m (79.2m) 0.9p (9.1p) 1.6p (1.6p)
Ocean Group (I) 536.6m (496.5m) 25.2m (21.1m) 11.6p (9.9p) 4.71p (4.71p)
RTZ (I) 2,062m (1,857m) 570m (427m) 31.5p (26.3p) 10.5p (9p)
Virtuality (I) 6.26m (4.12m) L583,000 (L695,000) L2.2p (L2.7p) nil (- )
J Laing (I) 553.2m (573m) 9.7m (11.9) m 6.7p (9.4p) 3p (3p)
(Q) - Quarterly (F) - Final (I) - Interim
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