SCOTTISH & NEWCASTLE is not small — its market capitalisation and annual sales figure top £4 billion. But it commands less elbow room than most of those standing at the bar frequented by the world’s drink industry giants such as Anheuser Busch, Heineken and SABMiller. The industry’s big players are also engaged in a frenetic period of consolidation — SAB’s recent and enthusiastically received purchase of Bavaria, the Latin American brewer, is just the latest instance of the activity.
It is natural, therefore, to wonder if S&N, the brewer of Kronenbourg and Foster’s lagers, will get swallowed. Speculation of this sort has kept the share price buoyant over the past year. Stock changes hands for about 25 per cent more than it did 12 months ago, in spite of S&N encountering trying trading conditions.
The Bavarian deal has taken some of the fizz out of the bid story because SAB was identified as the most likely buyer and the Latin expansion will mean it keeps its hands in its pockets for the time being at least. Results posted yesterday also show that S&N is making solid progress and that takes some of the wind from the sails of bid speculators. Trading conditions are far from easy, especially on the Continent.
But the performance in the UK is encouraging. It is vital for a consumer goods company to spend, and spend well, on marketing and on product innovation. S&N’s investments in marketing and product innovation at its UK operations are proving fruitful. It is also making progress on return on capital targets. Buyers would have bought best before S&N began to recover. With propsects improving, the company is better placed to deflect predators.
Price is another problem for investors who hope that a bid will come. The current value of S&N’s debt and equity is about 11.5 times operating profit before depreciation and amortisation charges. SAB bought Bavaria for about 10.5 times and sits itself on an equivalent multiple of about 9 times. When you factor in the need to pay a premium over the market price, all but the most aggressive acquisitor will blench.
A bid may come eventually, however. S&N’s position in Western markets gives access to solid cashflows and emerging market exposure, especially to Russia, brings enticing growth possibilities. Hold.
Pendragon
AMID the slick of oil stocks dominating the lists of share risers yesterday, a company of a rather different sort managed to atract investor support. Shares in Pendragon, the car dealer that was once part of the Williams Holdings empire, rose by nearly 4 per cent. Since the start of the month, the shares have added 18 per cent.
It is the sort of move that might suggest a takeover is in the offing. Anything is possible, of course, but it seems that the share price rise has come because investors have had to get used to the idea that Pendragon is not nearly as exposed to slowing consumer expenditure as they thought.
Interim results posted at the back end of last week highlighted Pendragon strengths and the share price undervaluation. In the context of a 6 per cent fall in new car sales in the first six months of the year, it may have been reasonable to expect Pendragon to suffer. The Longbridge tribulations could have worsened Pendragon’s plight, since it operates Rover dealerships. Yet Pendragon sales and profits rose by 10 and 20 per cent respectively. Acquisitions helped, but the 57 per cent increase in the interim dividend sent an unequivocally positive signal about the sustainable nature of the growth achieved at Pendragon.
It would be misleading to suggest that Pendragon was unaffected by the consumer slowdown and the fall in new car sales. It is just that the restructuring of the nation’s motor dealerships — spawned by changes to the block exemption rules — is delivering more benefit than is being lost to weakening consumer confidence. Since the company has one of the largest dealerships in the country and yet has a market share of only 3 per cent, the opportunities for further expansion are plain to see.
Pendragon’s gearing, which was 140 per cent 12 months ago, has fallen to 95 per cent. By some standards, 95 per cent may appear high, but in the context of Pendragon’s cashflow profile it is perfectly manageable. It also leaves it with the financial firepower to continue to consolidate.
Meanwhile, Pendragon shares, giving a 5 per cent dividend yield, remain cheap. Buy.
Elementis
IT IS a brave shareholder that questions the judgment of Edward Bramson and Matthew Peacock, the brains behind private equity turnaround specialist Hanover Investors. Since the pair amassed a 15.2 per cent stake in Elementis late last year, shares in the troubled chemicals concern have more than doubled. And with good reason. Investors backing the pair’s first project, the turnaround of 4imprint, a marketing company, saw shares rise more than fourfold.
Nonetheless there is something troubling about the sudden departure of Geoff Gaywood. Until yesterday he was the Elementis chief executive and although the arrival of Hanover had been followed by several boardroom departures, Mr Gaywood was a man in whom Hanover had expressed the greatest confidence.
Mr Gaywood presided over a slump which saw first-half results dip £3.1 million into the red, against a profit of £2 million last time. This may have done little to endear him to his new bosses. Perhaps Mr Gaywood proved himself unable to offer anything of value to Mr Bramson’s and Mr Peacock’s strategic review, the results of which are due to be presented to Elementis’s shareholders in early October.
Nevertheless the reluctance of the Hanover contingent to provide an explanation for Mr Gaywood’s sudden departure is at odds with a manifesto that makes much of a devotion to long-suffering shareholders.
Given the uncertainty it may be best to lock in profit and re-evaluate the share price when the strategy and the management are visible. Sell.
