Uk Stock Writeups

Finsbury Foods is a producer of speciality cakes & breads. It sells into the large food retailers, though is not heavily reliant on any one of the major supermarkets. All of their businesses operate in niche markets such as healthy-oriented products (e.g. Weight Watchers cakes, gluten-free breads) and premium products like the Tesco Finest & Sainsbury's Taste the Difference brands. These markets have been growing at over 5% per annum and look set to continue that momentum for the foreseeable future; indeed Finsbury Foods has been able to gain share in these conditions. The company has in place capacity to cope with sales levels more than 50% above those at present, so has plenty of room for growth. With a strong position in a range of niche markets and having passed the peak of its investment cycle, the company is a cheap, self-funding takeover in a sector that is ripe for further consolidation after Premier Foods' recent acquisition of RHM. With a forward earnings yield of over 10% and a forward P/Sales of less than 0.3x, the stock is cheap.

Sedol	Type	Price	Date
0918642	Buy	£ 0.85	30/01/2007
0918642	Buy	£ 0.956	19/01/2007
0918642	Buy	£ 0.944	12/01/2007

We sold FKI after a recent trading update highlighted that performance from its Logistex division was weaker than expected, and was unlikely to be able to grow profits in the foreseeable future. This was important as we had previously believed that this division, along with its two other industry-leading businesses (Lifting Products and Energy Technology), could offset the likely collapse of profits at its US Hardware division (which is exposed to the US residential construction market). Whilst profit growth at Lifting Products and Energy Technology remains buoyant, it is unlikely to surpass expectations in a meaningful way. Hence the reduction in our forecasts for Logistex has led to a cut in group profit and cash flow estimates. On these new estimates we found the share to be fully valued and hence sold. There remains the hope in the market that the forthcoming strategic review could lead to this conglomerate being broken up, but with risks to earnings now appearing to be to the downside (Logistex and Hardware could both disappoint, whilst a rosy scenario in Lifting Products and Energy Technology is already built in) we prefer not to hang around in hope when the valuation is full.

FKI is a diversified, industrial conglomerate with four decent, but separate, businesses, two of which are currently performing well whilst the other two are dogs! The group has consistently failed to prove the logic of keeping all four businesses under one umbrella, hence a large conglomerate discount has been applied to the share price by the market. Now management have finally announced they will undertake a strategic review, to be announced in March, which could herald the break-up of the group. This would likely be value-enhancing as at least the conglomerate discount will be removed. Even if there is no break-up, we see good value in this company. Even allowing for the two "dogs" to get worse rather than better in the next 18 months, and allowing for the large pension deficit to be plugged, we still see the shares as cheap in absolute terms. A "value play" that has been forgotten after years of underperformance, we now see the catalyst in place for the unlocking of its true value.

Sedol	Type	Price	Date
0329459	Sell	£ 1.158	03/04/2007
0329459	Buy	£ 1.058	01/03/2007
0329459	Buy	£ 1.08	26/01/2007