THE INVESTMENT COLUMN

The art of bad news at Allied

Just when they thought it might be safe to come out, Allied Domecq's shareholders were dealt another sickening blow yesterday. The wine, spirits and retailing group's ability to shock even its sharpest critics really does know no bounds.

Even the way the bad news is delivered is becoming something of an art form. Michael Jackaman, the retiring chairman, began his opening address to yesterday's annual meeting with the now customary platitudes about Allied's strategic focus, before smacking shareholders between the eyes with a warning that first-half profits would tumble 20 per cent. Some of the reactions from analysts yesterday were not surprisingly unprintable.

True, Allied has suffered from genuine bad luck. There was little it could do about the shooting of one of Mexico's presidential election candidates in the early hours of the day on which the deal to buy Domecq was clinched. However, a great deal of the other calamities are of Allied's own making.

Sir Christopher Hogg has his work cut out when he assumes the chair in the spring. Investors can only hope that he brings the best out of Tony Hales, chief executive. He has yet to do his undoubted skills justice since taking management control of the group following Allied's foreign exchange disaster five years ago.

Allied is clearly out of step with its main rivals, Guinness and Grand Metropolitan, in the global spirits business. Yesterday's excuse that profits from spirits in the US were being hit by destocking really does not wash given that Grand Met and Guinness raised the alarm over this problem 18 months ago.

Moreover, it raises an interesting question. If the distribution pipeline is jammed with Allied's products, how much of the profits booked in previous years were flattered by over-ambitious shipments of spirits to the US?

Allied's push to slim down to a more focused group has also, surprisingly, caused its share of financial pain. The raft of food business disposals, such as Tetley Tea and Lyons, has led to a dilution of earnings.

This sorry tale of woe was greeted in the City by across-the-board downgrades of pre-tax profit forecasts for the current year from around pounds 640m to pounds 580m. At that level, earnings per share will be 34p, implying a prospective p/e of almost 15 on the share price, which fell 8p to 507p. That is not demanding, especially backed by a 6 per cent yield - assuming Allied does not take the axe to the dividend, which analysts expect to be around 25p. But the biggest attraction of all remains Allied's increasingly serious credentials as a takeover target.

Investors warm to Farnell deal

With shareholders voting next Thursday on Farnell's proposed acquisition of its big American rival Premier, the electronic component distributor will have been relieved to watch its shares' recovery since the market's knee-jerk reaction on the day the deal was announced. While the vote is hardly in the bag, it would be surprising if investors were buying the stock only to shoot the deal down.

At 454p they have recovered nearly all the ground lost since the City started fretting about the short-term earnings dilution caused by the acquisition, the high levels of debt Farnell will incur to fund it, and the graveyard that the US has been for many other British companies trying to replicate their success over here with ill-conceived deals over there.

Those worries are real enough with the company more than doubling its size and wiping out its net asset backing with a sizeable goodwill write- off. But improving sentiment has focused on the earnings growth offered.

Where will it come from? First of all, by pushing Farnell's 45,000 products through the customer network of Premier's Newark subsidiary - and Newark's 120,000 components through Farnell's. Newark has 100,000 customers compared to Farnell's 60,000.

Next, by improving the operating efficiencies of Newark, which enjoys a 20 per cent net margin compared to Farnell's 27 per cent. Bringing the acquisition's three- to five-day delivery targets in line with Farnell's 24-hour promise will help, as will improving the relatively low 75 per cent chance of having an item in stock - Farnell's equivalent hit rate is in the high 90s.

Other gains will be made by reducing central overheads in the US, generating incremental sales from the already launched Farnell US catalogue and putting together IT, publishing and other functions.

NatWest Securities believes Farnell could turn earnings per share for the year just finished of 35p into 65p by the end of the decade. Two years out, the shares stand on a prospective p/e ratio of 14. The shares are still good value and the deal should be waved through.

Clyde explores Indonesian oil

The 1990s have proved a rocky ride so far for Clyde Petroleum, the misnamed Herefordshire-based oil company. In the space of just two years up to the middle of 1992, the shares lost close to nine-tenths of their value, but in the last 13 months they have outperformed the market by 28 per cent.

The catalyst for change was the appointment in July 1994 of Roy Franklin, a former BP executive, as managing director. He has been instrumental in shifting the focus of the company away from exploration towards lower- risk acquisitions which can profitably recycle some of the group's cash flow from oil production in the North Sea and Dutch gas fields.

The result has been a string of deals over the last two years or so, but yesterday's completion of the purchase of a 31 per cent stake in Marathon's Indonesian producing assets for $51m marks a steep change in the strategy.

The acquisition, Clyde's first move into Indonesia, fulfils Mr Franklin's ambition to add another leg to the business and makes it an operator of oil assets for the first time for some years. The tax take, at 85 per cent of profits after exploration, development and operating costs, is high in Indonesia.

But the attraction lies in the development of assets which currently amount to an effective interest in 11 million barrels of oil. Clyde reckons exploration can raise current production of around 7,500 bpd by around 50 per cent using existing production and handling facilities. Like the North Sea in the 1980s, the tax regime means that the government will pay for most of the development costs as tax write-offs.

Previous deals in the Netherlands have paid off handsomely, but the shares, down 0.5p at 58.5p, are still hovering just below net asset value. The strategy looks sound and Clyde's strong cash flow could attract a bidder, but the shares are likely to mark time while the Indonesian deal proves itself. Hold.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Sport
Kim Sears is reported to have directed abuse at Berdych
tennis
Arts and Entertainment
Cold case: Aaron McCusker and Christopher Eccleston in ‘Fortitude’
tvReview: Sky Atlantic's ambitious new series Fortitude has begun with a feature-length special
Voices
Three people wearing masks depicting Ed Miliband, David Cameron and Nick Clegg
voicesPolitics is in the gutter – but there is an alternative, says Nigel Farage
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
News
i100
News
people
ebooks
ebooksA special investigation by Andy McSmith
Sport
Chelsea manager Jose Mourinho
footballThe more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Life and Style
Vote green: Benoit Berenger at The Duke of Cambridge in London's Islington
food + drinkBanishes thoughts of soggy school dinners and turn over a new leaf
News
Joel Grey (left) poses next to a poster featuring his character in the film
peopleActor Joel Grey comes out at 82
News
i100
News
business
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee