THE thick end of £1 billion was added to the value of Reckitt Benckiser. Even for a chunky FTSE 100 company, this is a lot of money. When you take into account the fact that the shares were trading within a few pennies of their all-time high at the start of business yesterday, the rise looks even more impressive. When you remember that Reckitt shares also trade on a premium rating, it begins to look as if it might be gravity-defying.

Reckitt shares give a prospective dividend yield of 2.1 per cent, compared with 3.4 per cent for the London market as a whole. Its shares sit on a p/e ratio of 21 compared with the average for the FTSE all-share index of just short of 14.

But Reckitt shares have long looked expensive, and the company has shown an ability to rise to and then emulate expectations of it. Third-quarter figures posted yesterday suggest the company is unlikely to break the habit any time soon.

There was, admittedly, some slippage in overall profitability. But if you disregard the one-off costs resulting from the recent acquisition of BHI from Boots, Reckitt expanded profits by nearly 12 per cent.

The acquisitions helped to drive sales and profits forward and some may suspect that Reckitt needs to buy in order to secure growth that may prove illusory in the longer term. But it is significant that Reckitt used cash generated from within existing resources to fund the purchase of BHI. Less than a year after completion of the deal it is well on the way to paying down the debt it took on.

At the same time, it is fair to assume Reckitt will apply its own high operating standards to BHI and deliver genuine additions to the overall value of the group in the process. There is evidence of the success in news that Reckitt yesterday raised its estimates about the total value of cost savings and revenue benefits that will accrue as a result of the deal. It is also encouraging to see the integration occurring swiftly.

Reckitt may well top up its growth rate with more acquisitions in future. As long as these complement rather than replace the organic growth, shareholders can view the moves with equanimity. It has secured sound organic growth in the past by attending closely to costs and by backing its brands with generous investment in marketing. Critically, it has also managed to keep its customers and its selling prices keen through product innovation and development. Buy.

BBA

SHARES in BBA, the aviation-cum-textiles company, might have fared considerably worse, considering the amount of bad news that they have received over the last eight months. Despite enduring several nasty bits of bad news, the stock changes hands at about the same price as at the start of March and a little above the level seen two years ago.

First there was the unexpected departure of Roy McGlone, the chief executive. Then there were the admissions that Fiberweb, its textiles arm, was struggling to sustain itself in an increasing competitive environment. Fiberweb’s costs also rose thanks to the increased price of oil and the knock on effects on the price of synthetic materials it uses. Efforts to sell Fiberweb then proved fruitless, which was a shame because it it could have been offloaded at a decent price it would have provided ammunition to invest in the bigger aviation services side of the company.

Shareholders then learnt that the textiles and aviation parts of the business would be demerged into separately listed companies. This made good sense because it would allow the very different parts of BBA to benefit from the undivided attention of separate management teams. But it came at the cost of a hefty dividend cut. The combined payout to shareholders in the two successor companies would be only 60 per cent of what used to be paid by the undivided BBA.

As if that were not enough, yesterday’s confirmation of the demerger came alongside a warning that trading conditions for Fiberweb, already difficult, had deteriorated. Hopes for the textiles offshoot are further hindered thanks to the debt it is being asked to carry. Fiberweb will be a quarter the size of its sister company and have a market capitalisation of about £250 million. Yet it will carry £175 million of the total £400 million of borrowings owed by the unsplit enterprise.

Although the backdrop is unpromising, shareholders should stick by each successor company. Demerger provides the only workable way out of a tricky situation and the architects deserve support for pushing it through. Hold.

Carpetright

CARPETRIGHT has built a leading position in its segment of the home furnishings market with a simple business model. It has opened stores across the country and offered a variety of floor coverings at a range of prices. In doing so it has won custom of nearly one in every three UK households.

But with the store count in the UK approaching 500, the retailer has set its sights on Europe for further expansion. It has an emerging presence in Poland, where a young population is seeking a better lifestyle, as well as a more established one in Belgium and the Netherlands. The Czech Republic is its next target market, as strong sales growth from its European operations supports the case for further expansion.

Figures yesterday showed that growth in the UK is sluggish, as the summer heat and the football World Cup kept customers away. However, more buoyant housing market conditions should prove positive for the company. Improved stock management and purchasing is also feeding profit margin growth. Shares look good value at £11.83. Buy.

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