US Edition Northern Foods
62p +7
Questor says BUY
The main reason to own Northern Foods shares is the dividend – they currently yield 8pc. The shares have been recommended at 51p and 51½p and, following Wednesday's trading update, the buy stance is reiterated.
The mid-cap company produces branded and own-label food for UK supermarkets. Its products include well-known brands such as Fox's biscuits and Goodfellas pizzas.
Like-for-like sales in the first quarter rose 5.5pc, with the majority of this revenue gain due to an increase in volumes, not an increase in pricing. Significantly, volumes rose 4.2pc over the course of the quarter.
Northern also saw strong growth in its chilled foods, which were up 9.2pc as customers bought value lines. The switch to value offerings implies that there could be a hit on margins, which are likely to be tighter at the cheaper end of the market, but the company must still be turning over a comfortable profit on the range.
Bakery sales rose 6.8pc, after recent investment, but sales of frozen goods were a problem, dropping 1.5pc. However, this was the only real negative spot in the announcement and Northern said that frozen pies and meat grills continued to perform well.
Importantly, net debt is in line with most analysts' expectations, and guidance for sales and profits for the half and full year remain unchanged.
Questor is relaxed about prospects for the dividend payment. When a company has a high yield, the market is pricing this in for a reason.
It is arguable that the shares are trading with such a high annual payout rate because the market expects the dividend to be cut. However, management maintained the payout last year and, with trading improving, confidence should grow that the dividend will be maintained at current levels. Even if it is trimmed, it is still worth having.
Of course, as with any investment, there are risks. Questor believes that price inflation in soft commodities will be an unstoppable trend over the net few years – and if the company cannot pass this on there will be a knock-on reduction in margins.
However, Northern should be able to push the rise in input costs on to the consumer, despite having to deal with the notoriously tough deals the supermarket groups cut with suppliers. Last year input costs rose, but price rises meant the group increased its margins over the year to 5.4pc from 5.2pc.
The shares are now trading on a March 2010 earnings multiple of 9.5 times, falling to 8.6 in 2010. The yield is impressive, and you can even grab the final dividend payment from last year if you buy the shares now, gaining a near-immediate yield of 5.2pc.
The 2.95p a share payment will be sent on August 28 and the shares trade ex-dividend on July 29. Shares in Northern foods remain a buy for income seekers.
Bodycote
117¼p +2¾
Questor says HOLD
Two weeks ago Bodycote issued a profits warning, and most of the gains since their initial recommendation on February 26 were erased. The shares are still some 7pc ahead of the initial recommendation price, however.
The company is operating in unfashionable sectors. One quarter of sales are from treating metal parts for cars, where there is understandably less demand nowadays. The company is refocusing in other specialist markets, including treating jet engines – aerospace makes up 20pc of sales – and oil and gas pumps, which were responsible for a further 15pc of sales last year.
Questor argued that all of the gloom had been priced into the shares when the initial recommendation was made. With the shares trading higher than this after the group issued a profit warning, this appears to have been the case.
In the warning, Bodycote cited falls in industrial output globally. In European economies, such as Germany and Sweden where automotive, capital goods and general industrial activities dominate, the impact for Bodycote was significantly greater than in countries which also have substantial aerospace and power generation activity, such as the UK and US. This caused revenues in the first half to fall 20pc. On a constant currency basis, the fall is even worse, at 31pc. However, the company has a relatively strong balance sheet and is focusing on reducing costs. The group even managed to find itself a positive operating cash flow in the first half. At June 30, net debt stood at £89m after the group paid £23m to settle a tax bill and £10m on dividend payments.
"As a consequence of our short-order book and continuing uncertainty in market conditions visibility is very limited, but if demand remains at its current depressed levels the board would anticipate the outcome for 2009 being materially below recent market consensus," the company said.
There is no doubt that this year will be difficult. After the downgrades to consensus forecasts, the shares are trading on a current-year earnings multiple of 16.3 times, but this falls to 9.1 times next year. Management is expected to cut costs significantly, which will mean the company is highly geared to an upturn when it happens.
The yield is a nice 5.7pc, which is impressive, but after the warning Questor downgrades the stance to hold until there is clarity on the dividend payment.