The Investment Column: AB Foods cooks up big advance

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The Independent Online
It's hard to get too excited about AB Foods mixture of sugar, bread and Irish retailing, but you have to take your hat off to Garry Weston's unerring ability to beat expectations. Figures for the year to September had him doing it again and the shares, which have more than doubled since the end of 1992, added another 8.5p yesterday to close at 425.5p.

Partly, it's just been a much better year for food producers in general. After the margin squeeze of 1994 and 1995, pressure from raw material prices and packaging has eased. At the other end of the equation prices are moving in the right direction and AB's cost structure, especially in milling and baking, is in better shape.

Against that backdrop, the figures were always likely to be better, but a 17 per cent rise in world-wide sales to pounds 5.71bn and an 18 per cent operating profit jump were better than forecast. At the pre-tax line, profits rose 15 per cent to pounds 430m and earnings per share were 12 per cent higher at 31p.

For once, British Sugar was not the driving force, with profits marginally lower this year at pounds 183m as the strength of sterling reversed the benefits accruing from changes to the green pound. Allied Bakeries,however, continued to consolidate last year's bounce from five years of declining profits.

Looking forward, analysts expect things to get a bit tougher, but they tend always to say that about AB Foods and end up looking over-cautious. Still, on the basis of profits of pounds 450m this time and earnings per share of 32.5p, the stately progress this year does appear to be running slightly out of steam.

Arguably, however, the earnings story is only part of the investment case and few investors are likely to go short of AB Foods while the company continues to sit on an pounds 800m cash pile. If it does nothing that will be the best part of pounds 1bn before long, providing a meaningful war chest. Having acquired British Sugar in 1990, AB Foods has proved it has no fear of the big deal so a lot of expectation is riding on where Mr Weston's attentions will focus. What seems likely is that he will steer clear of increasing his exposure to Sainsbury's or Tesco. Recent deals in frozen dough, glucose and other ingredients have pointed to better margin avenues than the bread and packaged goods whose fate lies in the hands of the all-powerful grocers.

On the basis of the expected modest rise in profits and earnings this year, the shares stand on a prospective price/earnings ratio of 13 and they yield just 3 per cent assuming the forecast 10.25p dividend. In the absence of a sizeable earnings-enhancing deal, neither ratio points to much outperformance. But you can count on Mr Weston looking after the interests of investors. Hold.

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