Investment Column: Big Yellow proves big gamble for investors
Hilton Food Group; Alexon Group
Friday 15 January 2010
Our view: Hold
Share price: 341p (-7.7p)
On the whole, equity investors have had lots of fun over the past few months as stocks have soared following their hiatus during the credit crunch.
Nonetheless, those with all their eggs in Big Yellow Group's basket have had less to enjoy because its shares have slipped by more than 15 per cent since September. The storage company issued its third-quarter trading statement yesterday, saying that revenues and average rents in the three months to the end of December were marginally higher.
The problem is that there seems to be little on the horizon to suggest the share price will be given some oomph. "While current trading allows us to inch up our optimism, we continue to believe that 2010 will remain a patchy year for most consumer-facing businesses, including this one," said the group's chief executive, James Gibson. With no dividend, Big Yellow shares need to perform and, while the falls in recent months have made the stock more attractive against those of its peers, we cannot see anything on the way that would lead us to think there is likely to be a imminent spike.
That said, Mr Gibson, who steadfastly refuses to comment on the share price yesterday, insisted that the group would reintroduce a dividend in November, adding that while occupancy has fallen in the past two years, the company was well set to take advantage of any growth that might come this year and next.
Our doubts remain, however, and were it not for Mr Gibson's target of paying investors a dividend later this year, we would see little reason to hold on to the shares. The price has stuttered in recent months as alternative potential investments have thrived. However, we are prepared to give the Big Yellow Group the benefit of the doubt, but those holding the stock must be sure the economy is going in the right direction to drive the group's occupancy rate. If the dividend does not materialise, we would sell. Hold.
Hilton Food Group
Our view: Buy
Share price: 203p (+5p)
Hilton Food Group's specialist retail meat-packing business may not be glamorous but it has all the signs of being a real winner for shareholders. The last time we looked at the company – in the spring of 2009 – we tipped it as a "buy" on the basis of the recession-resisting properties of the food industry. We were right, and the company's stock has shot up by 40p.
Now, with the spectre of recession receding, the case is even stronger. Yesterday's trading statement reporting strong performance in line with expectations is just the beginning.
The eye-catching aspect of Hilton Food is its geographical expansion. In 2009 it moved into two new countries, the ninth and tenth on its books, with supplies to Latvia and Lithuania from Hilton Food's factory in Poland.
There was also healthy growth from the company's Irish breakfast meats project and good progress from the spreadables meat project begun in July the Netherlands. Finally, at the end of November, Hilton Food signed a Danish deal with Coop Denmark. Construction is about to start on the £20m facility and Hilton should start to see good growth from the agreement from next year.
Panmure Gordon calculates Hilton's price-to-earnings ratio to be 10.4 times, based on estimates for 2010. And with debt falling to just 0.7 times earnings, there is "substantial room to finance future growth opportunities as they arise," the analyst said in a note. This year's trading environment may remain challenging but Hilton Food is well positioned to carry on the good work. "Hilton remains our top-pick stock in the small and mid-cap food sector," Panmure added. We agree. Buy.
Our view: Sell
Share price: 36p (-4p)
There was not a lot to like about the womenswear retailer Alexon's trading statement yesterday, which said its same-store sales over the 23 weeks to 9 January fell by 14.3 per cent, largely because of the poor weather. The first three weeks of the period saw like-for-like sales fall by 6.2 per cent.
Of course, you cannot legislate for the snow and ice but, all the same, it was a disappointing result, with margins also sliding because of increased promotional activity that obviously is not working.
Alexon claims the reaction to its spring and summer merchandise has been positive and full-price strike rates across all brands are improving. Efforts are being made to ease the pressure of onerous property leases to help accelerate a turnaround plan.
Before yesterday's fall, the shares were valued at 18 times full-year forecast earnings – a valuation they did noy deserve. Seymour Pierce notes that Jacques Vert has significantly outperformed Alexon in the downturn, and has a stronger balance sheet with a cheaper valuation. We agree. On Tuesday, we said buy Jacques Vert; today we say sell Alexon.
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