Shares: Sunshine should help profits grow: Firms supplying gardening products may be ripe for recovery

NEWSPAPER coverage at this time of year proves that the British are gardening mad. We spend an estimated pounds 2bn a year on our gardens, and that figure is projected to grow by 36 per cent or more over the next five years - especially if there is plenty of warm weather.

This suggests that investing in companies supplying garden products should be profitable. There is a recovery story, too, since the last four years have seen below-trend growth hit by poor weather, recession and the slowdown in housing-related purchases. There are signs of a pick-up but it is still early days.

One difficulty is that for most quoted companies the impact of garden-related sales is dwarfed by their other activities. Tomkins sells mowers but also guns and bread. Although Homebase and B&Q sell huge quantities of plants and garden tools, these are still a minor part of the total sales of Sainsbury and Kingfisher respectively. Three companies that are heavily exposed to garden-related spending are Wyevale Garden Centres at 175p, Headway at 38p and Ransomes at 27p. The last two are, in stock market terms, special situations - especially Ransomes, which is still in arrears on its preference dividend. But both are being revitalised by new management and have considerable speculative appeal.

Wyevale's 42 garden centres make it the UK's largest specialist operator. This leaves it well placed for acquisitions in a fragmented market. The group has good management and an excellent record. Since 1988 profits have more than trebled to pounds 4.45m and are forecast to grow to nearly pounds 6m this year for a prospective PE of 16.7. But the earnings per share trend has been flat, reflecting a rapidly growing equity base.

The hope is that Wyevale will now turn off the equity tap. This should be possible since it raised pounds 10.9m last November in a rights issue and has just sold a retail park to raise a further pounds 9.7m. If it can enjoy a growing stream of revenue through an expanding network of garden centres, a vintage period could lie ahead.

Headway is a more speculative story than Wyevale. The shares have risen strongly, reflecting the efforts of a new management team. This is led by Andrew Staniland, who first saved the group (previously known as Beaverco) from disaster, and who has worked hard to improve performance and shift the emphasis away from the volatile and working-capital-intensive garden furniture side.

This has already been done to considerable effect, with thriving businesses in sofa beds, acoustic and filtration products and, most recently, flat pack furniture via a small acquisition. There has also been rationalisation to improve productivity. On the garden furniture side, Staniland has sold two factories and is building a new, purpose-built 65,000sq ft one at a net cost of pounds 320,000 to boost capacity and productivity.

But the garden furniture business remains a wild card. Retailers are still overstocked from last year when the weather was appalling, so the rebound from heavy losses depends on the weather between April and June this year. At 38p the company is capitalised at around pounds 6m against sales heading towards pounds 30m and possibly overcautious third-party forecasts of profits of pounds 300,000 this year and pounds 400,000 next. Further acquisitions are likely, and the price could hit pounds 1 within two years.

Most speculative is Ransomes, with a worldwide business making and selling domestic and commercial grass- cutting equipment that lost more than pounds 8m last year. Borrowings are more than 450 per cent of shareholders' funds and the company is in arrears on the dividend of its convertible preference shares. There is no ordinary dividend. Not surprisingly the share price has collapsed from a 1989 peak of around 240p to 27p after a 1992 low of 6p. Current market capitalisation is around pounds 50m including the convertible.

Interest has been aroused because a US hedge fund specialist recently bought 30 per cent of the outstanding convertible preference shares. Their price has since shot up to 75p. The move looks a shrewd one since Ransomes has managed to pay some of the arrears on the preference stock and will be fully up to date if and when it can pay the dividend due for the six months ended 30 April 1994. It seems clear this will be paid eventually, so investors seeking income could look at the 8.25 per cent convertible preference shares that, even at 75p, would yield 11 per cent on full payment. They convert into equity at 174.4p, so real bulls should buy the ordinary rather than going in via the preference capital.

The ordinary shares could do well if fears of a massively dilutive debt-into-equity swap prove unfounded. The good news is that there are no restrictive loan covenants to force such a reconstruction. There are some pounds 28m of surplus properties to sell on a December 1993 valuation; and the trading performance looks set for a dramatic improvement. Last year's losses were after-interest costs of pounds 8.4m and pounds 5.8m of exceptional items. This year the absence of those rationalisation costs would imply operating profits (pre-interest) of pounds 5.3m. In addition, the group reckons to have cut its cost base by dollars 8m ( pounds 5.3m) in the US and pounds 2m in the UK.

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