The Investment Column: Iconic brands fail to make Premier look appetising
Legal & General; Mears
Friday 11 January 2008
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.
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