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

Babcock International; Catlin
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The Independent Online

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.


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.