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.

Mears

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
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones