Yahoo Finance Questor: the power of strong brands – yes, our costs will rise, but we can put our prices up too
The share price has yet to do anything of note but it is only a month since our analysis of PZ Cussons and we are in no hurry.
Moreover, last week’s trading update from the owner of Imperial Leather soaps, Carex hand gels and St Tropez tanning products suggests that we are on the right track, as Jonathan Myers, the chief executive, now expects adjusted profits before tax to come in ahead of expectations for the financial year that ended on May 31.
It is no surprise to see Myers highlight rising input costs and it is every bit as pleasing to see the executive team talk of their ability to drive their own prices higher to compensate. Improvements in the sales mix are also helping to protect and even improve margins.
This is exactly what brand names are all about: loyal customers mean pricing power and pricing power means cash flow and cash flow means strong finances, the ability to invest and the potential to pay (rising) dividends over the long term.
The turnaround initiated last year is still in its early stages and shareholders must not expect too much too soon. But the sale of two businesses, one in Nigeria and one in Australia, and this trading statement suggest that the new management team is off to a good start. Shareholders must now await the full-year results due on Sept 22.
A forecast price-to-earnings ratio of more than 20 and yield of 2.5pc, a premium and a discount respectively to the London market as a whole, may not leap out as representing value. Yet profits are still well below the 2014 peak, so that earnings multiple could be deceptive. If the firm reaches management’s targets of annual mid-to-high single-digit percentage sales growth and a mid-teens operating margin, earnings will grow and the rating will fall over time, all other things being equal.
It is a case of so far, so good at PZ Cussons.
Questor says: hold
Ticker: PZC
Share price at close: 253.5p
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Update: Anexo
And so yet another of this column’s selections draws a bid. This time it is Anexo, the Liverpool-headquartered company that provides credit and legal services to motorists who are involved in an incident that is not their fault.
Late last month Isle of Man-based DBay Advisors tabled a proposal worth 150p a share. It now has until July 21 to make a firm offer under the Takeover Code.
The potential offer represents a premium of just 9pc to the share price when the approach was made and that, frankly, looks a bit skinny. However, rank-and-file shareholders may not get much of a say in the matter: DBay Advisors already has a 29pc stake, while the executive chairman, Alan Sellers, managing director, Samantha Moss, and co-founder Valentina Slater own 38pc of the equity between them.
At least we are already in the black with this one, as we first assessed Anexo at 127p last autumn, so investors can sit and wait to see what develops.
The shares still look like good value.
Questor says: hold
Ticker: ANX
Share price at close: 148p
Update: Serco
Two upbeat trading statements in the space of barely a fortnight from Serco last month suggest that recovery in the support services giant’s operational and financial performance, as well as in its reputation, is well and truly under way.
Contract wins (or successful retenders) with the Ministry of Defence, Department for Work and Pensions, and Department of Health and Social Care explain why orders exceeded sales by 1.7 times in the first six months of the year. That provides management – and shareholders – with welcome visibility.
The company is now free of onerous contracts and the balance sheet carries barely £275m in net debt, so customers can again view Serco as a long-term partner without any qualms.
The only real bad news is that the shares are still slightly below our initial entry point in January 2017, but that is our fault. After the recent positive developments at least time is back on our side.
Serco can yet justify long-term support.
Questor says: hold
Ticker: SRP
Share price at close: 142.2p
Russ Mould is investment director at AJ Bell, the stockbroker.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
