Investment Column: Robust demand means Cranswick can stillbring home the bacon

Babcock International; Catlin

Our view: Hold

Share price: 710p (-3p)

Cranswick, a major pork supplier to the UK's big supermarkets, has had plenty to chew over in the last six months, which has been dominated by rising pig meat prices. Back in July, the company blamed "significant raw material price inflation" and "extremely demanding" market conditions for warning that its first-half profits will be lower than the same period in 2010.

Yesterday, the company provided confirmation of this weakness by delivering a 22 per cent fall in pre-tax profits to £18.5m over the six months to the end of September.

The group said the uplift in input costs, despite an improvement in the second quarter, had damaged its margins. While pig prices had declined to 144p a kilogram in October since hitting 154p a kg in the summer, they have recently ticked up again to 147p. This is obviously something that prospective investors need to bear in mind, but there was plenty to recommend in Cranswick's interims yesterday.

The profit decline was not as bad as City analysts had expected and Cranswick should benefit from some operating margin recovery in the second half, having agreed price increases with a number of its retail customers.

Indeed, it appears that demand for its pig meat products, including sausages and cooked meats, remains robust. Cranswick grew its revenues by 3 per cent to £393.9m over the six months, boosted by "strong" export sales to Far Eastern markets.

It should also benefit from new sausage and cooked meat contracts with Tesco and one with Asda for bacon in the second half. Above all, Cranswick demonstrated its "cautious optimism" in its prospects by raising its dividend to 9p, from 8.8p last year.

And yet, we remain circumspect until we get more visibility on future pig input costs and the willingness of its powerful grocery customers to agree to any future price rises. Therefore, we think the group is fairly priced on a forward earnings multiple of 11.6.

Babcock International

Our view: Buy

Share price: 695.5p (-1.5p)

As Babcock International's results showed last week, the support services and defence group is benefiting, and looks set to continue benefiting, from two developments. The group reported a 46 per cent jump in its first half profit for the six months to the end of September as these trends pushed sales up by 30 per cent.

To begin with, the company benefited from the booming South African mining sector, as strong demand for commodities meant more of them needed to be dug out of the ground – and at a higher price. In fact, with commodities at their present level, they are so lucrative to extract that there is a huge scarcity of mining equipment, which can only be good for Babcock.

The firm also received a boost from the trend towards outsourcing, as the governments in the UK and beyond increasingly look to farm out certain activities to cut costs.

Of course, there are headwinds. As the builder of Britain's new Queen Elizabeth class aircraft carriers, and as the company responsible for the maintenance of Britain's existing UK submarine and surface ship fleet, defence is a key part of Babcock's operation – and one of the areas most affected by the austerity measures.

Still, as Babcock chief executive, Peter Rogers, said: "The current economic climate is creating growth opportunities for us as people look to cut costs – there are a multitude of big contracts set to be awarded in the coming months and we're confident we'll win our fair share." Giving us confidence, Mr Rogers went on to put his money where his mouth is by announcing a 9.6 per cent increase in first-half dividend to 5.70p.

Catlin

Our view: Avoid

Share price: 392.8p (+6.2p)

Was Catlin's third-quarter trading statement, published yesterday, catastrophic? Insurers covering against major disasters enjoyed an unusually easy time of it during the latter part of the last decade. But now, mother nature has hit back. Catlin's "cat" losses this year have reached $670m (£420m), from $534m at the half. Floods in Thailand and Denmark plus Hurricane Irene are new hits, but the cost of previous catastrophes has risen.

On the plus side, Catlin says it is covered for 90 per cent of any further deterioration, gross written premiums are up 12 per cent on the first nine months of last year at $3.7bn, investment returns are okay and premium rates are rising at last.

But are they rising enough to make up for the losses and allow Catlin to make a decent return? Far too much capital has been sloshing around the industry and it's not yet clear that enough has been frightened off to make rate rises sustainable.

Catlin's shares trade at a 2 per cent discount to estimated net tangible assets, compared to a sector-wide discount of 6 per cent. That's too expensive, in our view.

Suggested Topics
News
Clare Balding
peopleClare Balding on how women's football is shaking up sport
Arts and Entertainment
Carrie Hope Fletcher
booksFirst video bloggers conquered YouTube. Now they want us to buy their books
Arts and Entertainment
Damien Hirst
artCoalition's anti-culture policy and cuts in local authority spending to blame, says academic
Sport
premier leagueMatch report: Arsenal 1 Man United 2
PROMOTED VIDEO
Arts and Entertainment
A comedy show alumni who has gone on to be a big star, Jon Stewart
tvRival television sketch shows vie for influential alumni
Arts and Entertainment
Kirk Cameron is begging his Facebook fans to give him positive reviews
film
Life and Style
Small winemakers say the restriction makes it hard to sell overseas
food + drink
News
i100
Life and Style
fashionThe Christmas jumper is in fashion, but should you wear your religion on your sleeve?
News
ebooksNow available in paperback
Sport
Tony Bellew (left) and Nathan Cleverly clash at the Echo Arena in Liverpool
boxingLate surge sees Liverpudlian move into world title contention
Voices
Neil Findlay
voicesThe vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Life and Style
food + drinkMeat-free recipes and food scandals help one growing sector
News
i100
Arts and Entertainment
Jason goes on a special mission for the queen
tvReview: Everyone loves a CGI Cyclops and the BBC's Saturday night charmer is getting epic
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

Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

Reach Volunteering: Charity Treasurer

Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

SThree: Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

Ampersand Consulting LLP: Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible
Look what's mushrooming now! Meat-free recipes and food scandals help one growing sector

Look what's mushrooming now!

Meat-free recipes and food scandals help one growing sector
Neil Findlay is more a pink shrimp than a red firebrand

More a pink shrimp than a red firebrand

The vilification of the potential Scottish Labour leader Neil Findlay shows how one-note politics is today, says DJ Taylor
Bill Granger recipes: Tenderstem broccoli omelette; Fried eggs with Mexican-style tomato and chilli sauce; Pan-fried cavolo nero with soft-boiled egg

Oeuf quake

Bill Granger's cracking egg recipes
Terry Venables: Wayne Rooney is roaring again and the world knows that England are back

Terry Venables column

Wayne Rooney is roaring again and the world knows that England are back
Michael Calvin: Abject leadership is allowing football’s age-old sores to fester

Abject leadership is allowing football’s age-old sores to fester

Those at the top are allowing the same issues to go unchallenged, says Michael Calvin