Dr Pepper a tonic for Cadbury

THE INVESTMENT COLUMN

When Cadbury-Schweppes paid pounds 1.7bn for US drinks group Dr Pepper in January, swallowing the soft drinks giant looked like a recipe for indigestion. There were concerns, for example, that the deal, which transformed Cadbury's market share in the United States, taking it to third position, would incur the wrath of the big two players, Pepsi and Coca-Cola.

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.

BBA benefits

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.

Amec offers

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.

COMPANY RESULTS

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

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sheridan Maine: Finance Analyst

Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

Sheridan Maine: Financial Accountant

£150 - £190 Daily Rate: Sheridan Maine: One of London's leading water supplier...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

George Parlour: Client Billings Assistant

£15 - £17 Hourly Rate: George Parlour: Do you have experience in media billing...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor