Smaller Companies: Recovery could hit prospects of booming home sales trio

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The Independent Online
IT IS NOT every day that a company quoted on the Unlisted Securities Market reports a 30 per cent jump in annual profits, earnings per share and dividend.

Farepak, which earns most of its income selling Christmas hampers via a mail order network, did on Thursday - but the shares fell 3p to close at 253p.

At first sight the market reaction appears churlish. But the price of Farepak shares, like those of its rival Park Food and of Betterware, the doorstep seller of low-ticket household items, shows the strains of over-enthusiasm.

Their attraction is easy to see. Most consumer-oriented businesses will compare the past couple of years with a journey through the valley of the shadow of death. But the story from Farepak, Park Foods and Betterware is all sweetness and light.

The main business of each company is reliant on sales agents, commonly pensioners or housewives who want to supplement income by working part-time on a commission-only basis.

Fixed costs remain more or less static, so the greater the number of sales agents the greater the sales and the greater the profit.

The sales agents are key to the success of all three companies, because without them the companies cannot shift products.

Central to the trio's recent success has been the misfortune of others. High unemployment and straitened times for those in work mean a larger pool of labour willing to become sales agents.

Optimism about the three companies is backed up by the fact they are selling at the cheap end of the market. Value for money means plenty of sales.

Future prospects depend on their sustaining the current level of penetration of the markets. But if better times are around the corner they may not find it easy to recruit or hold on to sales agents.

Farepak has subsidiary businesses in travel and cooked meats. Both have yet to prove profit protential and could conceivably be a burden.

The stockbroker Granville predicts that Farepak will make pre- tax profits of pounds 5.5m ( pounds 4.8m) for the year to April 1993 and Park Food will make pounds 8m compared with pounds 6.9m for the 12 months to March next year.

The predictions suggest Farepak's shares trade on 15.2 times prospective earnings and Park Food on 14.5 times.

At such levels the prices are full, particularly in the context of recent outperformance. Both have done 40 per cent better than the all-share index, but this takes little account of negative pressures.

Betterware shares, however, are overpriced. The broker Albert E Sharp thinks it will make taxable profits of pounds 10m for the year to March 1993, indicating a multiple, at Friday's 315p close, of 19 times earnings.

After a two-year run that has seen the price rise from 60p to 315p and outperform the market by 500 per cent, it is time to take profits.

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