SMALLER COMPANIES: Banana split brings profits

Geest may be on the fringes of what could be called a smaller company - it is valued by the stock market at over pounds 200m. But with pre- tax profits of pounds 17.3m last year, it could hardly be described as a titan of the food world, writes Richard Phillips.

One year on from the disposal of its banana business is a good time to take a closer look at the company, which now focuses on chilled and prepared foods.

Clearly, ditching bananas has transformed its fortunes. Bananas may have been a proud tradition for the original family-run concern, but conclusive proof of the skins waiting to trip them up came in 1995 when banana prices fell 30 per cent. The shares skidded to a low of 107p. They have since staged an excellent recovery, to 317.5p.

Much of this has come from a confidence that Geest can now fulfil some of the promise it has held out to investors for many years, but routinely failed to deliver. The convenience food side has been promising since the mid-Eighties, but was always overshadowed by the banana problems. With pounds 147m for the business, Geest made a tidy sum and parted company with its chief executive, David Sugden. The group had net cash of pounds 32.3m at the end last year, enough to help fund a few decent-sized acquisitions in the markets it now covers.

In convenience foods, Geest offers fresh soups, dips, pizza, dressed salads, pasta and chilled bread. In 1996 soups, where Geest claims to be market leader, showed spectacular 45 per cent sales growth. Pasta and bread both grew 29 per cent, while the lowest growth was a decent 14 per cent for dressed salads.

Stripping out bananas took out pounds 258m of sales in 1996, leaving group sales at a much reduced pounds 401.5m. Operating profits, however, climbed to pounds 15m from pounds 9.4m, and pre-tax from pounds 3.3m to pounds 17.3m.

Clearly, the erratic profits record of the past six years could be coming to an end. Margins on many lines should be resistant to competition for a few years yet. The company has shown it can build new lines as older ones succumb to commoditisation - where everybody and his dog are in - and margins vanish.

John Marshall of brokers Mees Pierson says pre-tax profits could reach pounds 23m this year and pounds 27.5m next, putting the shares on a price/earnings ratio of 13.9 times and 11.4 times respectively. The group would probably like its dividend covered twice over. On that score, it should be able to increase it to 9.5p this year, from 8.4p, and to 11p in 1998, leaving cover at 2.4 times.

There is one more lure for gamblers. With relatively low gearing and a clutch of blue-chip customers such as Marks & Spencer, Tesco and Asda, Geest is a tempting morsel to a predator. With the family stake sold there is every chance a deal can emerge. On these grounds, the shares are a buy.

Copyright: IOS & Bloomberg