SHAREHOLDERS have endured rather than enjoyed George Weston’s first 18 months as chief executive of Associated British Foods.
Shares in the food manufacturing group, which owns the Primark clothing chain, have underperformed the market average by about 10 per cent since Mr Weston took charge in April 2005. That is hardly disastrous, but in the context of the 100 per cent outperformance in the five years preceeding Mr Weston’s accession, it is disappointing.
Thorough-going reform of outdated European Union regulations controlling sugar production has caused most of the damage. Reform was required, but it denied ABF a chunk of profitability. An ill-starred advertising campaign for ABF Kingsmill bread featuring Elvis Presley did not help, and yesterday the company had to admit that Primark, the retailing jewel that has sparkled for so long in the ABF crown, had lost its shine. Like-for-like sales at the chain have evaporated in the past quarter, where growth had run at 6 per cent in the first half of 2006.
Since ABF is 60 per cent controlled by his family, Mr Weston may feel the disappointment more than anyone. But while ABF has come up against a few difficulties in recent months, it is too soon to write off the company, or Mr Weston. The company has tackled regime change in EU sugar head on by buying into Ilovo, the southern African sugar producer. Ilovo sugar production can be pumped into the EU unconstrained by quota. In addition, Ilovo should continue to see strong and growing demand on its home soil.
At the same time the Primark difficulties must be kept in perspective. Like-for-like sales were growing at 12 per cent last year, so Primark is doing well to maintain the performance. Moreover, ABF will expand Primark’s total trading space by 40 per cent this year, so the promise of handsome actual sales growth remains.
Advertisement
ABF, renowned in investment circles as being staid, is latching on to some interesting new development ideas. The link with BP, the oil company, to explore ways of producing biofuels from wheat and sugar beet is just one such example.
Despite recent share price weakness, ABF shares still look quite pricey. The prospective p/e ratio is 16 and the dividend yield is a mere 2.4 per cent so stock may continue to tread water for a while. But the shares are well worth holding.
:image:
Enterprise
NEWS in April that Jack McGrory was to step down as chief executive of Enterprise, the utility services company, was worrying. Mr McGrory, who formerly worked for Mowlem, held his post at Enterprise for only two years.
Advertisement
The disruption caused by such a shortlived appointment was a concern in itself, particularly since Mr McGrory had embarked on an acquisition spree during his time at the company. Would those acquisitions be unpicked now he had moved on? That would cause even more distruption, and also raised the possibility that the value of capital invested in the purchases would be destroyed.
Moreover, Mr McGrory was appointed with the aim of bringing big company management experience to Enterprise, a high-growth utility services company. When he was replaced by Owen McLaughlin, a founder of the business, it looked as if pride might have been preventing the old guard from accepting the new ideas. Corporate governance concerns may have grown when it transpired that Mr McLaughlin, who was chairman to Mr McGrory, was to replace him as chief executive at the same time as retaining the top job on the board.
Evidence supplied by interim results for the six months to June 30, posted yesterday, suggests that Enterprise is in decent shape. Mr McGrory’s departure, meanwhile, appears to come down to disagreement over acquisitions strategy. Mr McLaughlin contends that Mr McGrory was going too fast.
Investors with concerns about the stability of Enterprise will be hearthened to hear that the company is intent on moving more cautiously on acquisitions. It is also comforting to hear Mr McLaughlin’s commitment to ensuring that acquisitions are properly integrated. That reduces the risk of failure at the companies bought and maximises returns from holding the new business.
Enterprise shares, which have doubled over the past five years, should continue to benefit from the trend towards outsourcing. The dividend yield on the stock is only 2 per cent but the payment is rising at double-digit percerntage rates. Buy.
Advertisement
Bovis
BOVIS HOMES painted an optimistic picture of the housing market after releasing a solid set of interim results. Profits rose by almost a fifth to £53 million and, more impressively, operating margins held firm at 22.7 per cent even though land price inflation is outstripping house price inflation.
Land prices are rising by roughly 10 per cent a year — more than double the average 4 per cent rise in average selling prices. This is a problem for Bovis, which is banking on sales volume growth to offset lower house price inflation.
The company has built up a large land bank of plots with planning consent as well as land, which has still to receive consent. It will not, therefore, be forced to pay sky-high prices for new land to achieve building targets. Meanwhile, reservations are up on last year and sales rose in August despite the interest-rate rise.
The shares, which have fallen 9 per cent since March, generate a prospective 3.9 per cent dividend yield, and extra spice comes by way of private equity bid speculation that is circling the sector. Buy.