THE INVESTMENT COLUMN
Wednesday 05 July 1995
It is five months since Dalgety announced it was selling its Golden Wonder and Homepride businesses to pay for the pounds 440m acquisition of Quaker's European pet foods. The plan was to move away from snacks and sauces to concentrate on pet food, agribusiness and food ingredients.
The City liked the strategy but wondered whether the company could achieve its aim of raising pounds 300m from the disposals. That target looked much more attainable yesterday when CPC, the American food group that makes Ambrosia rice pudding and Knorr soups, agreed to pay pounds 180m for Dalgety's Golden Wonder Pot Noodle division. Final offers for the Homepride and Golden Wonder snacks businesses are already in and the company says it hopes to announce buyers for both by September.
The shares put on 4p to 445p in response to the news, but the City could be in for a disappointment. The prices to be obtained for the snack businesses are likely to be disappointing compared with pot noodles. The snacks market is competitive and neither PepsiCo, which owns Walkers Crisps, or United Biscuits, which owns KP, is likely to be interested. In sauces, a possible buyer is Unilever which has already bought the Colmans mustard and sauce business.
Progress in the pet foods business is already being made. Dalgety plans to save around pounds 40m by reducing administration costs in Europe, increasing efficiencies in manufacturing and extending some of the Spillers formats, such as foil packs for pet food, to the Quaker brands. The UK market for dog food has fallen recently, but Dalgety is more confident about prospects for Europe, where Felix cat food is the fastest-growing brand in the sector.
Dalgety has been impressed with the Quakers management and a string of new product launches is in the pipeline. The marketing spend will rise and the company should be able to make its budget count more in pet foods, where it reckons it can hold its own better, than it could in the snacks business.
Brokers Henderson Crosthwaite are forecasting profits of pounds 128m for the year to the end of June and pounds 140m for next year, which puts the shares on a forward rating of around 13. After a good run so far this year, the share price is unlikely to excite in the short term but should improve when the benefits of the Quaker acquisition begin to come through. Hold for now.
its head again
Howden, the engineering group based in Glasgow, has been keeping a low profile since its well-publicised problems in supplying a machine to tunnel under Denmark's Store Belt. That dispute knocked a huge hole in profits in 1991 and saw the shares tumble to 30p at one stage.
Since then, and in the teeth of the worldwide recession, the group has been steadily rebuilding profits and last year saw the trend continued. Yesterday the group revealed a pre-tax figure of pounds 30.6m for the year to April, a rise of 11 per cent on 1993-94 which becomes 17 per cent if the previous year's pounds 1.38m gain on the sale of property is excluded. Earnings per share went from 7p to 7.6p, out of which a final dividend of 1.81p takes the total payment 11 per cent ahead to 2.7p.
The figures were broadly in line with expectations, but the shares added 2p to 85p yesterday as analysts warmed to news of a strong order intake last year. After signs of sluggishness at the interim stage, the order book ended the year 14 per cent higher at pounds 444m.
Compared with turnover of pounds 438m last year, that puts Howden in a strong position for 1994-95.
Profits got a pounds 4.03m boost from acquisitions, on which the group spent pounds 24.9m, including related expenditure, in the past 12 months. The three big ones, Donkin in South Africa, FCD in the US and Burton Corblin in France, chipped in around pounds 1m each, with a number of minor buys making up the balance of the contribution from acquisitions.
All areas of the world raised operating profits last year, but in Europe, the main theatre of operations, the total continues to be restrained by difficulties in Germany. Losses at the Wirth subsidiary were cut from the pounds 3m-pounds 4m run up the previous year, helped by a pounds 27m tunnel boring machine contract, but order intake there has not been sustained.
The strength of the mark and general economic problems continue to cloud the immediate outlook in Germany.
The still small Asian region, where profits rose from pounds 1.6m to pounds 2.1m in the latest period, is a key area for growth. Howden is spending pounds 5m out of a total capital expenditure budget of pounds 7m this year on a factory in China to produce fans and heaters for the power industry and further moves in the Pacific area can be expected.
Profits this year should hit around pounds 34.5m, making the shares reasonable value on a forward multiple of around 10. Selling by institutions who took up last year's placing at 93.75p could restrain the price in the short run, however.
Shareholders in Gibbs Mew, the Salisbury brewer, have prospered since seeing off Brierley Investments' 200p-a-share offer in October 1992. The shares at 433p are showing a tidy profit, even after last July's rights issue at 340p and yesterday's 11p fall. That owes much to the arrival on the board of brothers Tom and John Hedderson, who have taken advantage of the big brewers' forced pub sell-off in the wake of the Government's beer orders to reorientate the company towards retailing.
Last year's rights paid for the pounds 12.8m acquisition of Centric, owner of 197 tenanted pubs in the Midlands, which nearly tripled the group's estate and was the principal factor keeping profits moving ahead in the 12 months to 1 April. The pre-tax figure jumped from pounds 3.06m to pounds 4.44m, with Centric chipping in pounds 2.3m on sales of pounds 6.81m.
That left profits from the core operations down from pounds 3.19m to pounds 2.66m, an underlying decline of pounds 750,000. The shortfall is blamed on infrastructure spending to expand the group's 20 pub managed estate, a dispute over discounts with "a large supplier of wet goods" and a shift away from low-margin, high-volume free trade customers for Gibbs' beer brands such as Bishop's Tipple.
The board is being strengthened by the latest in a string of recruits from Price Waterhouse, this time Sir Jeffrey Bowman, and Richard Martin, formerly with Allied Domecq, as non-executive directors.
The plan is to keep growing the retail side, particularly in the South- east. There are still said to be plenty of opportunities to pick up pub chains whose flotation plans have been frustrated. But Gibbs is clearly going to have to pay up: last December's acquisition of six managed pubs around the M25 came in at somewhere over pounds 500,000 per property, compared with around pounds 150,000 for the average Centric outlet.
After a pause in earnings growth last year, brokers Greig Middleton are expecting profits of pounds 6.3m in the current period to get them going again. But a forward multiple of 13 probably fairly discounts the near-term growth.
Turnover pounds P/Tax pounds EPS Dividend
AromScan (F) 1.2m(70,000) -1.5m(4,000) -6.34p (1.29p) -(-)
Bromsgrove Industries(F) 113.8m(86.5m) 8.3m(6.6m) 7.82p (7.12p) 3.1p (2.8p)
Gibbon Group (F) 27.5m(25.7m) 2.05m(1.7m) 13p (10.9p) 4p (3.3p)
Morris Ashby (F) 32.7m(24.6m) 2.9m(1.8m) 18.2p (13.6p) 4.55p (3.8p)
Northamber (F) 178.5m(114.5m) 3.1m(669,000) 12.4p(3.1p) 1.2p(0.3p)
P & P (I) 171.7m(118.9m) 6.2m(2.7m) 5.3p(2.8p) 1.15p(0.95p)
Wilshaw (F) 45.9m(36.6m) 5.1m(3.25m) 3.84p(2.4p) 0.5p(0.35p)
(Q) - Quarterly (F) - Final (I) - Interim
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