UB keeps hacking away but offers few crumbs of comfort: The Investment Column

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The Independent Online
United Biscuits is doing most of the right things - hacking away at unprofitable divisions and directing investment at a handful of genuinely strong brands - but the cost of sorting itself out after the past five years' disastrous run was painfully evident in yesterday's full-year figures.

Eric Nicoli, chief executive, dismissed much of an pounds 84.7m goodwill write- off as nothing more than a goodwill accounting effect, but like the pounds 150.3m charge that devastated 1995's figures, the exceptional charge represents real money the company has squandered on shareholders' behalf. A glance at the chart shows the effect of those write-offs over the years on UB's net asset value. The latest hit left pre-tax profits for the year at pounds 24.4m, a dismal return on sales of almost pounds 2bn.

Earnings per share of 3.2p were quite an improvement on last time's 23.9p loss, but they left the 10p dividend, up 3 per cent, uncovered. Even before exceptional items, earnings of 14.8p were barely higher than the payout to shareholders.

The success of UB's drive to weed out non-performers and fix them or sell them on was shown by an increase in the proportion of group sales from 70 to 80 per cent that now provides an acceptable return of more than 20 per cent on capital employed. A year ago more than a quarter of sales were in Mr Nicoli's intensive care ward, but recovery at KP, Phileas Fogg and others reduced the problem areas significantly. With an average return on capital at those businesses that remain in the sick ward - mainly UK crisps, Benelux snacks and France - of 4 per cent, however, they represent quite a drag compared with UB's cost of capital of around 12 per cent.

The UK is definitely on the mend, posting a healthy 12 per cent rise in biscuit and snack profits during the year, a 24 per cent return on capital in frozen and chilled products and strong growth in core brands such as Skips.

The problems in continental Europe and Australia, where PepsiCo is throwing its weight about, remain daunting, however. The return in Europe is half UB would hope for while a 35 per cent fall in operating profits down under told its own story. There is no sign of a let-up in Australia.

On the basis of forecast profits this year of pounds 120m, the shares, which halved in four years before hitting bottom at new year, trade on a prospective price/earnings ratio of 16 at yesterday's close of 248.5p, up 11p. Against a backdrop of stiff competition, little geographical diversity and slow underlying growth that is quite high enough and only justified by persistent bid rumours. It is hard to see who would be prepared to pay much for UB and the recovery in the shares has probably run its course.