Investment: So should you invest in... food producers?

Sharewatch

DESPITE ITS undoubted defensive qualities, the food producers sector is another one of the well-established groups of companies that have ceased to excite investors. It is also an arena beset by specific, and highly publicised, problems.

First, there are the health scares that have affected meat producers in particular. Then there is dominance of the big supermarkets as the retail outlet for their wares. "The power is with the multiple retail chains and not the stodgy old food producers," said Damian Larkin of retail stockbrokers The Share Centre. "We have seen no great demand for analysis of the sector by our investors and it is a difficult business these days for investors to judge, as there is not much potential for incremental growth."

David Harbige at Barclays Stockbrokers said: "The market isn't particularly excited about food producers as there are better growth opportunities elsewhere. We are dealing with relatively mature companies which also have to cope with increasingly demanding standards from the retailers."

Lesley Lyndhurst, an analyst at NatWest Stockbrokers, said: "The supermarkets have the buying power to really screw them down on price There is a lot of overcapacity amongst food producers. What growth there is will come from squeezing margins and increasing market share.

"They have attempted to do this through occupying prominent positions on the supermarket shelves and special offers and promotions. The major theme of the sector over the past year has been `BOGOF' - But one Get One Free. But the companies have found that the wise shopper is simply taking advantage of these offers and not buying anything else so that the whole process was working against them."

Mr Harbige said that it is the bigger stocks in the sector that look the most attractive. "You have to be very large to get noticed by global fund managers. Unilever meets that profile in the UK, as, to a certain extent, does Cadburys.

Not everyone agrees that a UK focus is necessarily a bad thing. Mr Larkin said: "It is still a very defensive sector since the food-producing companies have primarily UK exposure and there is always a demand for food." As an example, he cites the recent interest in Associated British Foods. "The stock was given a push when a stockbroker gave it an `add' (as in `add to holding') recommendation and, having been depressed for a long time, it bounced up 4 per cent immediately. This rating was largely because it is seen as a defensive holding whose business will benefit if the UK joins the euro."

There have been some spectacular falls from grace in the sector, and many companies have been trying to slim down.

"There are various niches," said Mr Larkin. "If you look down the sector, you will see that Cadbury's chocolate business is materially different from Booker, which is frozen foods and cash and carry. One quite interesting company is Devro International, which actually makes packaging for food, especially sausages. It wasn't doing to well, but went up on the back of speculation that it would be bid for. The management came out and said that this was not the case, but it has stayed up, possibly because it doesn't make any food at all but is in the food sector."

"It is very difficult to see the light at the end of the tunnel for food producers," Ms Lyndhurst said. "We have been advising investors to stick to the quality companies, such as Unilever and Cadbury's, where growth will be supported by innovations. There are also low cost producers that seem to have got their act together, such as Unigate, which has speciality businesses in dairy products and cold meats."

"If there is one to hold it would be Unilever," agreed Mr Larkin, drawing attention to its spread of businesses. "Robert Wiseman also has reasonable earnings growth and only a forward p/e of about 12. Brake Brothers, which supplies chilled foods to the catering industry, has quite a good track record and was on our buy list, although its share price hasn't done too well as its business suffered during the World Cup from people staying at home."

Indeed, the chilled food sector is one where there appears to be genuine growth prospects. "We hold Hazlewood Foods and Geest," says Nigel Thomas, manager of ABN Amro's UK Growth Fund. "Another good looking stock is WT Foods, which recently bought Noon Foods, a speciality maker of Asian and Indian meals. The chilled food sector is a genuine growth industry, with a lot of potential from the growth of ethnic food sales, increasing use of microwaves, blast chilling and so on."

BUY

Alexon, says BT Alex.Brown, which notes the retailer coped well with last autumn's collapse of consumer confidence on the high street. Alexon cleared seasonal stock quickly and the analyst predicts it should report an underlying 6.5 per cent rise in 1998 profits on Monday. With 60 per cent of its fine chemicals business in high-growth pharmaceuticals and signs of recovery in Asia set to help its leather chemicals business, BTP is a firm buy (312.5p), says Sutherlands. Henry Cooke also rates the shares a buy, setting a short-term target of 384p a share. It says BTP has exciting medium to long-term prospects as more pharmaceuticals and agrochemical companies outsource fine chemicals production.

SELL

Graham Group (131.5p), says Albert E Sharp, which predicts the benefits of its shift from the plumbing and heating market towards building materials will not be as evident in 1999's figures as they were last year. It adds that although a trade buyer could value Graham well in excess of its current market capitalisation, likely partners are occupied elsewhere and the group is unlikely to feature in the sector's consolidation in the near future.

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
tech

Board creates magnetic field to achieve lift

News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
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

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Senior Helpdesk Analyst / Service Desk Co-ordinator

£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London