US Edition Northern Foods
51½p +1
Questor says BUY
The FTSE 100 has started to drift lower after putting on 30pc in three months. This is hardly surprising.
Questor has expected the market to move off highs for some time – it is a healthy move. Market timing is a very difficult thing to get exactly right, so Questor believes that investors should continue to buy as the recent froth comes off the market.
Northern Foods shares have been as high as 64p since their recommendation at 51p in March – and they have now moved back to close to their initial tip price. Questor first recommended the shares because of their impressive yield – and the buy stance is reiterated today for the same reason.
The shares are now trading on a March 2010 yield of 8.8pc. Of course, it could be argued that the shares are trading at this level because the market expects the payout to be cut, as its dividend cover stands at just 1.7 times excluding last year's restructuring costs. However, the company maintained its payout last year, which is a sign of management confidence in the future.
Of course, with unemployment rising, problems in the real economy will exist for some time. There is a danger that the dividend could be cut if significant economic problems continue. However, the group's food business is relatively defensive and the yield will still be worth having even if the payout is trimmed.
Its major customers are supermarket groups, which are notorious for squeezing margins at suppliers. However, the company managed to recover higher input costs fully through last year via pricing. Margins over the year rose to 5.4pc from 5.2pc.
It is still not too late to make a purchase and receive the final dividend from last year of 2.95p. It will be paid on August 28 to shareholders on the register as of July 31, with the shares trading
ex-dividend on July 29.
There are concerns about borrowings. Net debt at the end of last year stood at £206.7m, compared with a group market capitalisation of £260m, but the company has a revolving credit facility in place until 2012.
Management was cautious on trading in the current year. It expects this year will be "equally challenging", and it flagged several items that will likely have a negative impact on performance. Interest costs are expected to be about £3.5m higher than last year and a pension deficit of about £5m is likely.
Northern Foods is certainly one of the market leaders. It has a 16pc share of the UK ready meals market and a 25.9pc share of the chilled and frozen pizza business. It is dominant in the puddings sector, with a 60pc market share, and it has a 14.8pc share of the UK biscuit market.
The company is also moving into new markets. Last year, the group won a major contract to supply British Airways with on-board catering for its short-haul fleet starting in 2010. This contract was jointly won with DHL.
The company's restructure appears to be working. Northern issued eight profit warnings in the first five years of this century – but there have been none since its reorganisation started three years ago.
The shares are now trading on a March 2010 earnings multiple of 8.8 times, falling to 7.6 in 2010. This does not look too demanding after its recent restructuring. With a cracking yield to support the shares, they remain a buy despite the relatively low dividend cover.
Templeton Emerging Markets Investment Trust
359p +11¾
Questor says BUY
Questor is a long-term bull of emerging markets, particularly in Asia, Latin America and Africa. However, such investments will always be a bumpy ride.
Shares in Templeton Emerging Markets Investment Trust are currently up 23pc, having drifted down from being about 35pc ahead of their original recommendation price. However, there could be future falls that will create good entry points into this long-term investment.
A couple of weeks ago, Dr Mark Mobius, who set up this fund, said that a market correction in emerging markets equities of up to 20pc could happen in the next few months. He was speaking at the 20th anniversary of the establishment of Templeton Emerging Markets Investment Trust.
Last week, Jonathan Garner, Morgan Stanley's chief Asian and emerging markets strategist, said the developing world offered the only "secular bull market" among global stocks. He argued that this would be led by economic and earnings growth in China.
He think rallies in Asian markets will be driven by signs of strengthening economic recovery and higher commodity prices.
"Asia, excluding Japan, and emerging markets are the parts of global equities that we expect to do best," Mr Garner said.
Questor believes this argument, despite a warning this week from the World Bank that a lack of inflows of foreign capital will hit gross domestic product growth, although it expects the East Asia and Pacific area will show growth of 6.6pc this year, with South Asia growing at 4.6pc.
Emerging economies will recover faster than the Western world and there are fundamental drivers of growth that support this view.
This Templeton fund is a core strategic holding that is leveraged to the development of the East.
Buy.