The Investment Column: Iconic brands fail to make Premier look appetising

Legal & General; Mears

Our view: Avoid

Share price: 163.5p (-24.75p)

When Premier Foods announced plans to buy the breadmaker RHM for £2bn in late 2006 the shares rushed up to 300p in heady anticipation of the transformational deal.

Investors can hardly remember those halcyon days. The shares are now worth little more than half that amount.

Analysts keep reminding the market of the value of the company's iconic brands such as Hovis bread, Oxo stock cubes, Mr Kipling Cakes and Campbell's soups. But the shares have continued to lose ground and yesterday were the heaviest fallers in the FTSE 250.

There is little difficulty identifying the reason for Premier's malaise. The bread business bought from RHM has been toasted by the soaring priceof wheat, double what it costin 2006.

Premier tried to avoid putting up bread prices but wasfinally forced to rush out increases in September and again in October, but the damage wasalready done. Some estimates are that profits from breadmaking have fallen from nearly £70m, to no more than £15m.

In a year-end trading update Premier said it still expects to make profits within the range of current expectations, which are £182m pre-tax and 16p of earnings. Sales picked up during the second half, giving an overall improvement for the year of 1.4 per cent. But some areas, such as retailer branded products, fell by 8 per cent.

The squeeze comes as Premier shuts sites inherited from the acquisition of RHM and Campbell's which will cost up to £130m.

The challenge now is to absorb cost increases of at least 5 per cent, and that does not include the possibility of further wheat rises, and try to push up sales in what is certain to be a weakening marketplace.

Brokers have already lowered current-year forecasts by around 8 per cent. The shares were floated at 215p in 2004. Even at current depressed levels and selling on just 10 times expected earnings, they look vulnerable. Avoid.

Legal & General

Our view: Hold

Share price: 127p (-3.1p )

The slowdown in the housing market was always going to prove tricky for Legal & General, one of the leading providers of mortgage protection policies.

It was also facing weakening demand for unit trusts, Isas and other savings products. Concern over Northern Rock is thought to have dissuaded savers from buying investment schemes. So 2007 could have turned out to be quite unpleasant.

Fortunately, L&G was able to pluck a few rabbits out of the hat. Sales teams began promoting a range of critical illness protection policies and other products less linked to the housing market. Then in the final quarter of the year came a staggering increase in sales of bulk annuities. Tougher rules on recognising pension fund deficits forced more companies to insure all or part of their potential exposure to final salary pension schemes. In all, L&G saw its business double for the year.

But the real star of the show was the fund management arm, which grabbed an extraordinary £52bn of new business. Although £20bn came in one bite from the Hermes pension fund, it was still a considerable achievement.

L&G frankly admits the prospect of repeating the trick is unlikely. So it ended 2007 in robust shape, with sales of its core UK life and pension business up by 8 per cent to £1.1bn.

L&G brought forward the figures to coincide with a balance sheet briefing for analysts, and there was general relief at the outcome. However, the company's caution on the yearahead trimmed early gains inthe shares.

Despite its size, L&G has shown that it has the nimbleness and the marketing clout to develop new lines of business when conditions get tough. Hold.


Our view: Buy

Share price: 265.5p (+11.5p)

The nation's stock of council homes clearly need someserious care. The amount of work due to be carried out by Mears, the private-sector contractor which does much of the repair and maintenance, is now £1.4bn, according to a trading update yesterday. That is a lot of leaking roofs and windows. It means Mears will be working close to capacity for the next two years. Latest contract withBirmingham City Council is worth £65m.

Mears' record of working closely with local authorities has led it into the field of domiciliary care – looking after elderly people in their homes.

There have been some small acquisitions, but the market believes Mears needs scale to be a serious player and could be mulling over a largish bid – Nestor, worth £54m, is one name in the frame.

In the meantime Mears shares, treated brusquely by the market over the past year despite its long record of profit growth, jumped 11p to 265p, where they sell on just over 13 times expected 2008 earnings. Buy.

Suggested Topics
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
ebookA unique anthology of reporting and analysis of a crucial period of history
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
Rhys Williams
commonwealth games
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little