The Investment Column: Tate & Lyle needs commodity price sweetener

Kier Group; Wilmington Group
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The Independent Online

Our view: Hold

Share price: 396p (-4p)

The year 2008 was always going to be a year of holding steady for the sugar group Tate & Lyle after a profits warning last September did for the stock in quite a serious way.

What has not helped since then is the volatility in the price of wheat, which the group relies on for its North American food ingredients business, the biggest division of the company. Wheat has soared from $4 a bushel earlier this year to $8 in June, before falling back to about $5.50 this week. By fixing prices on its deals for a year in advance, the group has found these price fluctuations unhelpful, while the strengthening dollar has also been a source of irritation.

Despite these problems, the chief executive, Iain Ferguson, confirmed yesterday's trading statement, saying that the group was on track to meet full-year expectations, which will come as a relief for investors who can rest assured that a repeat of last year's profits warning is unlikely.

Mr Ferguson points out that looking at the price of the stock over any given time potentially does not give a good reflection of the strength of the group. He argues that investors should think about the fact that Tate & Lyle has outperformed the market in the last five years and that traditionally investors do very well out of punting on the group.

Analysts at the house broker, ABN Amro, say: "We see a 2009 price earnings ratio of 10.6 times as undemanding, while the shares also stand well below our deferred cashflow fair value. However, we expect investors will want clarity on the outlook for corn costs and commodity sweetener prices, the two key variables which are likely to impact the 2009/2010 profits outlook, before the shares are able to move beyond their recent trading range."

That is about spot-on. Buyers will regard yesterday's statement as a steady-as-she-goes update, but need a bit more clarity before jumping into the shares. Hold.

Kier Group

Our view: Cautious hold

Share price: 950p (-25.5p)

Those at the construction and support services group Kier say that if it is shares in a builder you are after, Kier is your best bet.

Agreed. The company has worked hard in the last few years to move away from being a common-as-mud housebuilder, with an increasing emphasis on state-backed construction projects. Yesterday the group said that orders, and more importantly profits, were up, and that in its sector it is at least as well-placed as anyone else.

Watchers at Numis back this up, arguing: "The group is on our view the best hybrid contractor, and shares fail to recognise the underlying value of the group's services and asset operations."

However, despite all the fanfare, the stock was off 2.6 per cent yesterday as some started worrying that the outlook is tough. Watchers at Panmure Gordon reckon the shares will dip to 910p, and that because of challenging markets, they would rather have exposure to companies that do not operate in the housing and property markets.

It is easy to argue that Kier is one of the strongest names in its sector. Its diversified model, the fact that a lot of work comes from public funds, and its work in the Middle East, which is also state-backed, are all reasons to buy. However, investors need to be very careful in this most dangerous of times. Cautious hold.

Wilmington Group

Our view: Hold for now

Share price: 173.5p (+5.75)

Owning shares in the media and professional training group Wilmington has been a bit of a roller-coaster in recent months. In July the group confirmed that it had received an approach, sending the stock soaring, only for it to collapse to its pre-talks level when the group said it is better off on its own.

It will take more than yesterday's impressive results to determine whether or not that was a wise move. For investors that have held the stock throughout, the group needs to give the stock the oomph to compensate for the loss made when the talks stalled.

In fairness to the company, which publishes magazines such as Press Gazette and Solicitors' Journal, pre-tax profits grew by an impressive 15.7 per cent, and the group has gone some way to compensating buyers by hiking the dividend by 16.7 per cent to 7p.

The chief executive, Charles Brady, says that the outlook for the group is rosy, and that its specialisation in offering training in regulatory and compliance areas will see it benefit when the current economic maelstrom abates. Those at Numis say: "We retain our positive stance on Wilmington, which we view as offering an attractive combination of resilience and growth, while the recent bid approach highlights a corporate value that could be realised in more favourable credit markets. Our target price remains 207p and our rating is buy."

Investors may wish to be a bit more cautious, wondering to what extent the group might be caught up with the poor sentiment among investors for other media stocks, even if, as Mr Brady argues, informed buyers are increasingly differentiating between companies in the sector. Hold for now.

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