The Investment Column: Safety-first makes Durex-maker SSL a good buy
Burberry; Hilton Foods
Wednesday 16 April 2008
Our view: Buy
Share price: 450.5p (+9.25p)
Everybody knows the benefits of using condoms, both from the point of view of protection against sexually transmitted diseases and stopping unwanted pregnancies. For the rather less racy, SSL International, which owns the Durex range as well as the Scholl footcare group, is also a pretty solid bet for an investment punt.
The argument is pretty simple: it probably does not matter about how bad any global financial downturn might be, people are still going to have sex, and such is the strength of the safe-sex message, few would consider not using contraception. The fact that during an economic downturn more people will be forced to stay at home as their disposable income falls is also good for SSL, as people are forced to think of their own entertainment. This is all good news for holders of SSL stock, who have seen the company's shares grow from 370p at the start of last year to today's value.
But for those not convinced by these arguments, the economics works too. Most of the group's sales are in Europe, allowing the group to take advantage of the strengthening euro. SSL's chief executive, Gary Watt, reckons that there are other reasons to be upbeat. Europe's population is growing older, but more healthily than previous generations, allowing more people to have sex for longer, so he says. The group is also increasingly targeting Asian markets, where populations tend to be younger.
The group does face risks that Mr Watt recognises. The group has closed its Spanish factory, relocating operations to India and Thailand, which is a concern. Although for investors losing sleep about stocks exposed to the credit crunch, this should come as a minor worry. The group has also made acquisitions in its Scholl division, which still need to be fully integrated.
Yesterday the group said it was on target to meet its 10 per cent profit increase. Brokers at Goldman Sachs said the statement "confirms that SSL offers strong operating profit growth with attractive and defensive categories in a difficult market environment".
Investors should be trying to find as many defensive stocks as possible at the moment. Buyers might find it difficult to find a safer buy than SSL. Buy.
Our view: Cautious hold
Share price: 438.5p (+42.5p)
When an investor hears the word retail, there is a tendency to run a mile. And with good cause in many circumstances as the credit crunch takes its heat out on the high street.
The clothing retailer and wholesaler Burberry likes to think of itself as being a bit different. In a trading statement released yesterday, the company confirmed that it is on track, with a rise of 18 per cent in second-half sales. Of course, numbers from this period include the Christmas period, which all retailers hope to enjoy, but the company has 42 per cent of its overall business in the wholesale market, with most of its autumn and winter ranges for 2008 already sold, and up 10 per cent on the same period next year.
"Burberry continues to buck the trend in a very challenging environment: proof of how a brand turnaround can cushion the impact of a downturn," say watchers at Redburn, who reiterate a "buy" recommendation on the stock.
The firm has shown a strong overseas performance, with 20 per cent annual growth in US, although its Spanish arm, which contributes about 20 per cent of the company's sales, grew by only "1 or 2 per cent" last year, according to the chief financial officer, Stacey Cartwright. She acknowledges that the pressure on the retail sector is a black mark for the group, but describes its progress as "steady as she goes," arguing that the luxury retail market has not seen as big a downturn as the lower-cost areas of the sector.
Ms Cartwright points out other internal worries, saying that the implementation of the SAP software program in the group's IT system is still a risk despite the European stage already being completed. As a retailer Burberry is a very good punt; however, given that few investors have to be exposed to the sector, most buyers should think carefully about the stock. Retailers from every walk of life will have a tricky 2008, and it is unlikely that any will come out unscathed. Cautious hold.
Our view: Hold for now
Share price: 180p (+6p)
Meatpacking might not be the sexiest of sectors that might catch the investors' eye, but Hilton Food's maiden results as a listed group, announced yesterday, were pretty respectable, with an increase in revenues to £577.7m from £526.7m in 2006. Pre-tax profits were down nearly £2m, which the group put down to costs associated with its flotation last May.
All good so far, but as most investors know, foods inflation is soaring, and producers and those involved in the processing services are increasingly wary about their growth prospects for the year. "We've two decades of food deflation," says the group's chief executive, Robert Watson. "It's natural that prices will rise, but this is affecting everyone in the food industry."
The story that buyers of the stock want to know is that groups like Hilton Foods are able to pass these additional costs on to their customers and ultimately the consumer, but Watson says that he agrees with Tesco chief, Sir Terry Leahy, that the issue of food inflation is "over-hyped". He does say that the company is trying to pass on as much of its costs as it can, without making the group's produce too expensive. Investors may choose to wait to see if they are successful before buying stock. Hold for now.
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