Investment Column: Premier Foods shares look cheap, so tuck in

Mondi; InterContinental Hotels
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The Independent Online

Our view: Buy

Share price: 33.2p (+0.9p)

While the City's main anxiety with Premier Foods in the first part of 2009 was its debt pile, the maker of Hovis bread continued to cook up tasty sales growth across many of its brands.

However, thanks in part to a £404m rights issue in May, the borrowings have been slimmed down to £1.4bn and the UK's largest food producer savoured a 6.5 per cent rise in sales of branded products over the 12 months to 31 December, to £1.68bn.

It also defied expectations that shoppers would switch from brand names to cheaper own-label ranges during the downturn. Among the best-performing brands, which account for 63 per cent of Premier's sales, were its Sharwood's and Loyd Grossman cooking sauces. Hovis also continued to grow, with sales up 15 per cent over the year following a brand overhaul and blockbuster television campaign.

These gains, together with cost savings, helped Premier to increase its annual tradin profit by 4.5 per cent to £323m. Pre-tax profits (including the impact of all that debt) also perked up to £47m, compared to the dismal loss of £405m a year ago when hefty restructuring charges took their toll. Looking forward, there is much to like about Premier, notably an undemanding 2010 price multiple of 5.6 times forecast earnings, which makes the stock look undervalued.

Premier also says it is confident of continuing to capture market share in key product categories and delivering sustained earnings growth and cash generation over the "medium term". There are some less savoury ingredients in the corporate recipe, however. Premier declined to offer any guidance yesterday on when it will resume dividend payments, which it suspended in November 2008. It also has a sizeable pensions deficit and its current servicing costs will increase by £10m in 2010.

Nevertheless, Premier is likely to benefit from a further up-tick in demand for brands as the worst of the recession recedes. It appears to have genuine momentum behind it, so buy.


Our view: Buy

Share price: 346.3p (+5.4p)

The paper and packaging group Mondi has not had a great recession. The South African company temporarily closed some of its paper mills because of limited demand last year, while a graph of its share price closely resembles a downhill ski slope in the months before the equity markets' nadir this time last year.

Mondi issues a trading statement yesterday, in line with Johannesburg stock exchange rules, a week ahead of its full-year numbers, which said that its earnings-per-share were likely to have halved. Underlying operating profits in the latter half of 2009 beat those in the first half as the recession eased, but they were still below those of the comparable period in 2008.

Several one-off charges, including the costs of mothballing its machines, will hardly help the numbers, but things appear to be getting better.

The company's shares have actually put on more than 100 per cent in the past 12 months, making any brave investment a year ago look inspired. Moreover, analysts at Mondi's house broker UBS are upbeat, saying that the positive second-half performance augurs well for the future. They are attracted by Mondi's grade exposure, low cost position, restructuring actions and leverage from recent investments. They are are also encouraged by the recent momentum shown by the shares.

Trading on a forcast multiple of 8.78 times full-year earnings, there is certainly room for growth, while the 2.15 per cent dividend yield is a nice bonus to have. Despite the recent rise in the share price we feel that there is more in the tank, so buy.

InterContinental Hotels

Our view: Sell

Share price: 893p (-27p)

The world's hotel market has been battered by the worst downturn in its history and InterContinental signalled yesterday that the industry is not yet out of the woods, as it posted a 34 per cent fall in 2009 operating profits.

As with its rivals, the owner of the Holiday Inn chain has been hit by companies cutting back on business travel in the US and Europe. IHG's revenue-per-available-room (revpar) fell by 3.8 per cent globally last month, although this was better than the 10.9 per cent fall in the fourth quarter and the overall slump of 14.7 per cent in 2009.

Still, the world's largest hotels group continued to invest in its brands, notably Holiday Inn. It opened a record 439 hotels last year, with nearly 400 planned for 2010. It also maintained its final dividend at $29.20. IHG's shares trade on a 2010 price-to-earnings multiple of 21.2, cheaper than rivals such as Marriott but still pricey. Because of this and the likelihood it will be at least 2011 before the industry really gets going, we think its time to take profits. Sell.