The Electronic Telegraph 25 April 1995 CITY

The Questor Column

Edited by Daniel Bolger

AB Foods sustains growth

WHILE most of his competitors plan no further than their next budget, Gary Weston thinks in decades.

Like the man, who at 67 has been chairman of Associated British Foods for nearly 30 years, the company ploughs on inexorably.

The latest results of the food manufacturing giant, for the six months to early March, show another steady rise in sales-up 9pc rise to £2.25 billion.

Operating profits increased 4pc to £153m but that was entirely due to British Sugar, which chipped in £84m and boosted margins to over 20pc.

Life is much tougher in bread baking and milling, with supermarkets continuing to demand discounts. A price increase of 2p a loaf is holding, barely, but with some discounters still selling bread for as little as 19p, profits were no more than flat, with margins a meagre 4pc.

The agricultural businesses, boosted by the Bibby acquisition, are also having a difficult time and Irish retailing had problems in its textiles operation.

By contrast, investment income has bounced back after last year's poor returns from the gilt market, where most of the group's £398m cash pile is invested. But with a smaller profit from selling shares in Berisford, pre-tax profits came in marginally lower at £173m.

Needless to say, this has not deflected the group from its relentless investment. Spending on new plant and equipment to reduce costs and improve efficiencies has totalled £200m in the past 12 months, one-and-a-half times depreciation, and another £80m has gone on bolt-on acquisitions.

Even after that, the group generated more than £40m of cash in the past six months.

The half-year dividend is being maintained at 81/2p on September 1 but an increase at the final stage is looking increasingly likely.

Broker Kleinwort Benson forecasts profits of £356m for the full-year, putting the shares on 121/2 times earnings.

Rock solid. Return to top

Smooth running at McKechnie

THE parts are clicking into place at McKechnie. The plastics and engineering group has spent the past five years reshuffling its business portfolio and getting out of heavy metal bashing.

It is now benefiting from the combination of more helpful markets and recent acquisitions.

Linread, the fasteners company that McKechnie bought for £26m last June, chipped in around £2m, with margins running in double figures, compared with a small loss just before acquisition. The American plastics operations have bounced back into the black after the closure of two out of the three factories and the vehicle components operation is benefiting from cars built in Britain for export to the Continent.

That helped half-year profits to end January jump by half to £20m on a one-third advance in turnover to £255m. Chief executive Michael Ost was as pleased with a 11/2 point improvement in margins to 81/2pc as with the new-found balance of the group-the plastics, consumer products and specialist engineering divisions each contributed a third of sales.

Geographically, the group's spread is less perfect. Over half of turnover is still generated in the United Kingdom, where the housing related market is still weak, and Mr Ost would like to expand in Europe, particularly in plastic vehicle parts. On top of that, the Australasian operations are suffering from a 12pc drop in the New Zealand dollar (where the group manufactures) against the Australian dollar (where it sells).

But that should not prove too much of a drag on momentum and broker BZW expects profits of £45m, against £35m, with a 16p dividend after the one-tenth increase in the interim to 51/2p on July 24.

Gearing is low at 14pc and the shares, up 61/2 at 4251/2p, do not look expensive on 13 times earnings. Return to top

American-minded Farnell plays it by the book

HOWARD Poulson, chief executive of Farnell Electronics, does not want to be accused of expanding at break-neck speed. The group's move into America has been researched for months, the locals are well behind in terms of expertise and, anyway, Farnell is only talking about minor acquisitions for the next couple of years.

For a group with net cash of £95m (half its shareholders' funds), this looks like admirable restraint. Even so, Farnell is now entering a stage of much higher risk and that may hold back the shares given their 19pc outperformance of the market since last October.

But the arguments in favour of America look compelling if British superiority in catalogue distribution is to be believed. A small slice of a $4 billion market would be a powerful new source of profits if margins of over 20pc can be replicated across the Atlantic. Thankfully, Mr Poulson has no ambitions to tackle the Americans in volume distribution, where margins are thinner and price, rather than service, is the main weapon.

Expansion into Singapore, and later Hong Kong, may be the more challenging route. The locals there do not currently buy from catalogues and some cultural education will be required. Nonetheless, Asia Pacific is an obvious place to establish a base for a group that is running out of room to grow quickly in Britain and has made its major acquisitions in Europe.

Those deals have thrown up no nasty suprises and the management deserves backing for its new plans. Whether it needs so much cash to achieve them is another question. Farnell threw off £35m last year and is likely to have money in the bank for some time yet.

Broker NatWest Securities forecasts a rise in pre-tax profits this year from £62.1m to £731/2m. That puts the shares, down 5 to 585p, on 16 times earnings. About right for a quality business. Return to top

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