Man's volatility looks set to stabilise

INVESTMENT COLUMN
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The Independent Online
Shares in ED & F Man have proved as volatile as the company's commodities to fund management businesses. Unfortunately for investors, even after a rise of 3p to 167p yesterday, the price remains stubbornly below last October's 180p launch.

The group, one of the biggest sugar and cocoa traders in the world, has been hit by its reclassification from the food sector to financials, and its dependence on the dollar. The main impediment to the share price, however, remains the unpredictability of its earnings - and with some reason, as yesterday's results testify.

Pre-tax profits rose 12 per cent to pounds 78.3m in the year to March, but the mix has altered radically in Man's first full-year results as a listed company. Profits from sugar trading have more than doubled, rising from pounds 15.3m to pounds 37.3m, more than offsetting a slump in investment management - formerly the group's biggest earner - from pounds 25.5m to pounds 13.2m. The swings were less extreme elsewhere, but a pounds 1.7m dip to pounds 10.6m in the cocoa trading result was almost exactly matched by the rise to pounds 10.2m at the Man International futures to energy broker.

To be fair, last year was exceptional. Fund management, where Man packages futures and options in offshore funds, has been a steady generator of profits for years. Last year, performance fees "evaporated" in line with performance. That is now improving and, despite the problems, total funds under management crept up to more than $1bn last year.

Meanwhile, sugar had a barnstorming 12 months, boosted by good trading in the physical markets. Man was lucky that pounds 7m losses at a new 50:50 joint venture in Australia came in the year that it made a pounds 9m gain on a court case against a privatised Brazilian sugar agency.

Further trading losses of pounds 4m to pounds 5m can be expected in the current year as a result of the highly competitive Australian market, but Man's unique local distribution network covering 30 countries gives grounds for optimism that future sugar profits are firmly based.

Cocoa was afflicted by some classic ailments last year, not least of which was "witches broom", a disease that has ravaged the Brazilian crop, hitting exports and processing volumes.

In broking, Man now has one of the largest players in the business following the pounds 20.8m acquisition of Chicago-based Geldermann in December.

Gearing of 254 per cent looks high, but given the liquid nature of the business, Man's banks would be comfortable at above 400 per cent. Profits this year could rise to pounds 87.5m, putting the shares on a modest p/e of seven. Currently yielding 7.2 per cent on a pro forma basis, they look attractive, with a share buy-back surely a possibility.

Reg Vardy keeps getting it right

Reg Vardy, the Sunderland-based car dealership group, has developed an agreeable habit of outperforming the market. The company continued the trend yesterday when it announced a turbo-charged 31 per cent increase in profits on the same day as new car registration figures for June showed UK sales up a paltry 0.11 per cent and private, non-fleet sales down by 0.6 per cent.

In the year to April, Reg Vardy recorded profits of pounds 11m on turnover up 27 per cent to pounds 377m. The group bucked the sluggish national trend with sales of both new and used cars up by 26 per cent.

So how does Peter Vardy, who controls nearly half the shares, keep getting it right? One reason is that the group is very well managed and adopts a conservative attitude to acquisitions. While rivals were embarking on hefty acquisition sprees 18 months ago, Reg Vardy was more selective.

It takes around four years for a car dealership to reach maturity, as it develops sufficient trust with first-time buyers for them to return for repeat purchases. Vardy's steady drip feed of acquisitions is now yielding strong organic growth. For example, dealerships bought before 1993 increased profits by 76 per cent last year.

More recently, the company has increased the pace, buying 11 dealerships since May 1994. These include the Altwood chain of three BMW dealerships, which recorded profits of just pounds 1m on sales of pounds 56m last year, but should make higher returns under Vardy's stewardship. The company has now reached its target of 40 dealerships ahead of schedule.

Another Vardy strength is in the sale of ex-rental cars, which the hire companies sell after just a few months in their fleets. These have proved popular with punters who see the deal as a good way of buying a low-mileage, practically new car at a substantial discount. Vardy sells 2.5 used cars for every new one and has developed good relationships with hire companies.

Vardy's shares have enjoyed an impressive run so far this year, accelerating from around 150p at the turn of the year to 246p yesterday, up a further 13p. Panmure Gordon is forecasting profits of pounds 13.5m next year, which puts the shares on a forward rating of 12. A justified premium to the sector.

Inveresk rides

strong demand

Inveresk is another company like ED &F Man which has been riding the commodity cycle since its stock market debut. Shares in the specialist paper group have been on a roller-coaster ride downwards from a peak of 229p hit in March 1994, just after the pulp cycle bottomed out and nine months after their flotation at 150p.

Since the end of 1993, pulp prices have soared from $400 to $925 a tonne and there is not much sign of a let-up. Some producers have already announced further increases which could take the price through $1,000 by the end of the year.

Luckily for Inveresk, demand remains strong and in the latest six months it has recovered 96 per cent of the increased costs by raising its own prices. With a 6 per cent volume expansion on top, the group has managed to keep profits moving forwards despite its own cautious prognostications earlier in the year.

Interim results unveiled yesterday showed a 4.9 per cent rise in the pre-tax figure to pounds 4.72m, on turnover 28 per cent ahead at pounds 61.2m, in the six months to 3 June.

Indeed, demand is so strong that Inveresk is finding difficulty meeting it. Inveresk says the current maximum output of 120,000 tonnes could go to above 130,000 without building a completely new plant. With gearing zero, it has the financial capacity to go even further, particularly through acquisitions.

It has done well in attacking overseas markets with its specialist products and full-year profits could rise to pounds 9.1m this year. But the shares, up 12p at 184p, look high enough on a forward rating of 15.

COMPANY RESULTS

Turnover pounds P/Tax pounds EPS Dividend

Albrighton (F) 8.1m(5.1m) -1.4m(766,000) -2.1p (1.2p) -(0.4p)

Burtonwood Brewery (F) 48.7m(50.5m) 3.5m(3.1m) 11.1p (9.9p) 4.5p (4.2p)

Crest Packaging (F) 43.7m(43.0m) 2.8m(4.8m) 5.3p (9.1p) 2.75p (2.75p)

ED & F Man (F) -(-) 78.3m(70.1m) 21.8p (20.7p) 3.2p (3.2p)

Hamlet Group (F) 77.2m(71.9m) 6.1m(5.3m) 12.02p(11.7p) 4.2p(4p)

Hampson Industries (F) 102.5m(91.5m) 5.9m(4.2m) 5.33p(3.05p) 1.65p(1.45p)

Ideal Hardware (F) 102.3m(71.8m) 6.1m(4.6m) 19.6p(15p) 5.2p(-)

Inveresk 61.2m(47.9m) 4.7m(4.5m) 6.3p(6p) 1.93p(1.84p)

Reg Vardy 377.4m(298.2m) 11m(8.4m) 16.4p(12.9p) 3.75p(2.6p)

(Q) - Quarterly (F) - Final (I) - Interim

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