Investment Column: Sugar deal sweetens AB Foods' prospects

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AB Foods

Our view: Buy

Share price: 653p (-6.5p)

From Twinings tea to British Sugar to Primark, the discount clothing outlet, Associated British Foods is one of the most diverse companies on the FTSE 100. It is also performing well, with half-year results published last month showing a solid increase in pre-tax profits.

Yesterday the company announced that it has bought the Spanish sugar producer Azucarera Ebro, which supplies half the sugar used in Spain and Portugal, for €385m. With the group already being the world's second biggest sugar producer, the acquisition hardly denotes a change in direction, but investors should be pleased that the company is building its more defensive side, rather than ploughing cash into the part of the business that is more reliant on the lethal retail sector.

The group's stock hardly budged on yesterday's news, but has fallen marginally since the half-year results. According the house broker, Panmure Gordon, the shares are now looking attractive, trading at 11.7 times its 2009 price earnings ratio, and 6.7 times enterprise value to Ebitda. The watchers have a price target of 830p for the stock, and although there does not seem to be much in the current market to get investors that excited, the group's shares have remained fairly stable in recent months, which is no mean achievement in these markets. While some of AB Foods' more discretionary products may get hit in the recession, its focus on the sugar market, and on Primark, which is leaving all in its wake, should more than compensate for the dodgier parts of the company's portfolio. Add to that the fact that 55 per cent of the stock is owned by the Weston family, which has not suggested it is in the mood to sell, and there is a compelling case for the stock.

Next year is likely to bring more bad news for the economy, but with a strategy to carry on in the same vein as the past, AB Foods is likely to prove to be a safe bet. Buy.



Spice

Our view: Buy

Share price: 87p (-6.5p)

For investors seeking safe havens, outsourcing and utility stocks have generally been about as good as it gets. Finding a group that combines the two should be the icing on the cake for risk-adverse buyers.

The analysts were falling over themselves yesterday to heap praise on Spice, a support services company that specialises in the energy sector. The group posted stellar interim numbers yesterday, with pre-tax profits up 13 per cent to £9.4m and an outlook that would not have looked out of place in the boom years. The chief executive, Simon Rigby, says he is pleased to run a "very boring and predictable company" and that the shares "have never been better value".

Shareholders might be a little disappointed that the stock has dropped by nearly 10 per cent in the last three months, but for those looking for a safe punt for 2009, Spice is a prudent buy. Despite Mr Rigby's admission of dullness, there are things that investors can get excited about. The group is likely to be a beneficiary of any future climate change legislation, for example, which will lead to increased spending by the energy groups, much of which is likely to find its way into Spice's coffers.

Independent analysts at Royal Bank of Scotland said that the long term prospects "remain extremely bright". The shares are rated similarly to the rest of the support services sector, but the Spice's areas of business should prove attractive in what is likely to be a rough 2009. Buy.



Wichford

Our view: Sell

Share price: 42p (-3p)

Companies that depend on the Government for their entire income have been lauded in this column as safe bets in recent months, but the property group Wichford proved yesterday that dependence on public money is not a guarantee of protection.

The company lets all its property to central government, and as such its rental incomes are safe and the prospect of defaults is minimal. Despite all this the shares were down 6.7 per cent yesterday, adding to the two-thirds fall over the last 12 months.

The reason for the unpopularity of the stock is the fall in net asset value (NAV) as property prices have plummeted. Wichford's NAV fell to 89p from 209p this time last year, with a fall of £141.3m in the overall value of the group's portfolio. Ignore this, say analysts at the group's brokers at Evolution, who argue: "Wichford's shares are yielding 20 per cent, suggesting the market is worried about a dividend cut in the future, but the dividend is fully covered by rental income."

The problem is that the market is not listening to these arguments. Wichford may prove to be a winner when things improve, especially with a move to index-link its incomes, but with further NAV reductions looking likely, the market is going to continue to be wary. Sell.

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