Associated British Foods worth holding on to until markets rise

Kidde hit by slowdown in aerospace sector; Ask's pizza success makes shares look tasty

Associated British Foods is not the most whiz-bang, set-the-pulse-racing company in the world but in difficult markets it has the kind of qualities investors love. It is solid. It is defensive. It has cash. This is why the shares have risen nearly 20 per cent since the start of the year in a market which has tanked. ABF is the fifth best performing stock in the FTSE 100 index this year after only the three tobacco companies and Reckitt Benckiser. And it is why The Independent nominated the shares for its Ten to Tuck Away portfolio at the mid-point of the year.

The shares shot up to nearly 600p on the back of yesterday's trading statement and only another market wobble knocked them back to 579.5p.

The statement was, typically, a steady-as-she-goes affair. Full-year results for the year to 14 September are expected to be in line with forecasts. This means pre-tax profits of about £410m. And cash generations is strong.

Since taking over as chief executive, Peter Jackson has restructured ABF, selling business like jams and Burton Biscuits and buying others such as the Mazola oils interests from Unilever earlier this year.

The cash pile still stands at £950m and though the market keeps looking for a blockbuster deal, ABF has preferred smaller acquisitions, principally in the oils and ingredients sector.

Other news yesterday was that British Sugar continues to trade well in the UK but that a poor crop and low prices have held back the Polish sugar division. And the deal to buy out the 19 per cent minority in the Australian division will be put to shareholders today. That should value the rump at about £57m.

Meanwhile, the Primark discount retail business continues to perform well with like-for-like sales in line with the 4 per cent increase reported at the interim stage. More space is being sought. And with Littlewoods looking for buyers of its high street stores, there are lots of opportunities.

The shares trade on a forward p/e of 16. The yield is only 2 per cent and if markets recover, investors may desert a stock like this. But they remain worth holding for now.

Kidde hit by slowdown in aerospace sector

Kidde was supposed to be the dull performer in the old Williams conglomerate that was broken up two years ago. But it has ended up being a far better investment than the Chubb security business which issued a profits warning only two weeks after the Williams demerger.

Kidde makes fire equipment such as extinguishers and smoke alarms, but it also produces more specialist, sophisticated, equipment for use in industry – for instance in putting out oil fires. Kidde also has a sizeable aerospace business, providing fire equipment to both the civil and military industries. Last week Kidde announced that it had been awarded a big contract to supply the Joint Strike Fighter aircraft under development by the US military. This will be worth some $200m (£127.74m) in sales, over 15 years.

Since Kidde's debut as an separate stock two years ago, the shares have been quite volatile but closed yesterday at 65p, little changed on the 69.5p closing price on its first independent day of trading in November 2000.

The two most notable events to have hit the company are the sharp downturn in the civil aerospace market and a US lawsuit. This litigation relates to the copying of a domestic fire escape ladder that was invented and patented by a rival.

Yesterday Kidde took an exceptional litigation provision of £14.5m for this case, which halved pre-tax profits to £8.6m, for the half year to 30 June. Group sales fell by 3.4 per cent to £414.6m, but better cost control meant that margins were maintained.

The company said its current trading position is "mixed", with some business areas growing well and others affected by weak demand.

Since the 11 September terrorist attacks, the likes of Boeing are making fewer planes, so they need less fire equipment . The military business is performing better.

Demand for fire protection equipment is underpinned by increasing regulation, which requires ever greater precautions against fires. This underpins Kidde's market.

The stock trades on a lowly forward multiple of under 10. But given the uncertainty in the civil aerospace market, the shares are best avoided while doubts remain over the market.

Ask's pizza success makes shares look tasty

Ask Central's fast-growing pizza restaurant chain seems to be flavour of the month with diners and the City alike. Despite the economic downturn and a fall-off in tourists visiting its West End restaurants since 11 September, the company feels it is in a position to open 22 new premises this year and 30 in 2003.

The aggressive programme is being driven by the strong cash flow from its Ask, Zizzi and Its chains. The company's turnover rose 25 per cent to £45m on a 28 per cent increase in pre-tax profits to £7.6m in the last six months.

Ask has looked particularly tasty in the last year as its larger rival, Pizza Express, has finally seen the shine go off its garlic dough balls due to tough economic conditions and restaurant customers tiring of its staid gastronomic offerings.

The fear is that Ask could go the same way. Undoubtedly, its track record of 30 per cent compound growth of the last five years cannot be sustained indefinitely and the company must guard against the perverse-sounding problem of generating more cash than it can put to a profitable purpose. This problem has already afflicted Pizza Express.

Ask argues the breadth of its offerings should stave off fatigue with its food for quite some time. Pasta and other Italian dishes make up a significant proportion of its menu as well as pizza. And it caters for the traditional trattoria-lovers at Zizzi as well as those seeking the minimalism of Ask.

Ask's restaurants are well represented outside London, which cushioned the fall-off in tourists business since last September and diners also spend more per meal outside the capital because they are not rushing off to the theatre.

Ask's shares dipped 5p to 162.5p. It is expected to make pre-tax profits of £16m this year and is on an undemanding forward p/e ratio of 13. Snap some up.