Emap reads and sounds like it is worth keeping

Leave Northern Foods on shelf; Kingston rings the right numbers

Emap, the radio group and publisher, has shown its resilience, having got over its American difficulties. Full-year results, for the year ended 31 March, showed underlying turnover up 3 per cent to £938m while operating profit was off just 1 per cent at £182m. That is pretty commendable in a period when the media sector saw its revenues decimated by a savage downturn in advertising. About 45 per cent of Emap's turnover depends on advertising.

It turns out that advertising in consumer magazines, which is one of Emap's main lines of business (its stable includes FHM and Heat), held up well through the downturn. And, although the high growth phase is clearly over for men's magazines in the UK, the division still showed circulation gains.

The company is looking for bolt-on acquisitions for its business-to-business publications and exhibitions unit (Emap Communications) and to add to its interests in France. It recently looked at but walked away from the business magazines put by for sale by Pearson.

This year Emap has committed an extra £30m to launches and greater editorial investment. The group's bottom line was dragged into the red by exceptionals, including the loss from the sale of Emap USA in August. The US business, acquired for $1.5bn (£1bn) in 1999, had proved a disaster for the company, and was sold for just $500m.

Everything seems to be ticking along nicely, except radio, where advertising is still tough but likely to improve in the second half of 2002. The most interesting strategic question for the group is what to do about its radio assets, which include Kiss FM, the youth music station. Although radio makes up about a quarter of the group's valuation, it is one of the top players in the UK, along with Capital Radio and GWR.

There is expected to be a wave of radio mergers over the next couple of years. Emap says it wants to be a consolidator in this process. Although the new draft Communications Bill opens up a lot of options, there is still competition law to meet and here all the big groups may find the opportunities more limited.

Because of the slower growth and less fashionable status assigned to print assets by the stock market, Emap's stock rating, on a forward multiple of about 19, is a lot less demanding than a pure radio group. However, having had a good run since September, Emap shares, which closed at 875p, appear to be up with events and in line with the sum of parts valuation.

Leave Northern Foods on shelf

As the UK's largest producer of pre-packaged meals, Northern Foods should know a thing or two about adding value. For harassed housewives, hungry bachelors and time-pressed career women, Northern's larderful of ready-made products, from pizzas to puddings, add value to their hectic lifestyles. Northern's shares have also added value to investors' portfolios over the past 12 months, thanks largely to their prime defensive qualities.

Now, after four years of heavy spending to reorganise the business following the demerger of Express Dairies in 1998, the pressure is on for Northern to add value to all the capital it has invested.

The group, which earlier this year bid farewell to its founder Lord Haskins after 40 years, has been busy rationalising its factories, closing some and opening others such as its Goodfella's pizza site in Ireland. It is banking on benefits from increased efficiencies and new products feeding through to improve margins and lift sales.

A bad first half, which was marred by the spiralling cost of raw material such as milk, blighted Northern's full-year results despite a pick up in the second half. Pre-tax profits for the year to end-March were £83m compared with restated profits of £94.6m last year on sales up 6 per cent to £1.46bn.

Opportune share buybacks helped Northern to boost its earnings per share after a first-half decline. The group set the tone for further improvements by raising its dividend by 6.5 per cent to 8.2p, which analysts expect to support the stock going forward. The post year-end sale of its Ski and Munch Bunch yoghurts business also left Northern's balance sheet in better shape.

As demand for convenience food grows, so do Northern's sales to the Big Five food retailers. Underlying sales to Marks & Spencer, Tesco, J Sainsbury, Asda and Safeway – Northern's biggest customers who account for nearly three-quarters of the group's total business – have already risen 4.5 per cent this year.

The shares, down 3p to 180p, trade on an inexpensive p/e ratio of 12 times and yield a tasty 4.5 per cent. Investors should leave a few tucked away on their shelves for now.

Kingston rings the right numbers

The Hull-based telecoms company Kingston Communications is, at this rate, in danger of finding itself among the survivors of the current telecoms shake-out.

The company, which ended the year with £92m of debt, still believes it is fully funded and analysts reckon it will turn cash flow positive in 2004.

Yesterday's year to 31 March results were in line with most analysts' forecasts. Underlying, or Ebitda, profits from continuing operations were £29.1m, up from £15.8m, on sales of £316.3m, up 40 per cent.

More of the same was on the agenda in that its core telecoms business, "inbusiness", did well while its "inmedia" division, which supplies broadcast transmission facilities and installs TV and radio studios, disappointed thanks to generally tough conditions.

Ebitda at "inbusiness" increased six-fold to nearly £6m on turnover of £196.8m, up 55 per cent, while Ebitda at "inmedia" slumped to £3.4m from £5.6m a year ago on sales of £32.1m, up 7 per cent. The latter division's results, however, also included a bad debt provision of £1.1m.

Another disappointment was the loss of a telecoms contract with Centrica, although that should not cause too much pain since it generated margins of less than 10 per cent. It will, however, hit the top line to the tune of about £20m a year. Nevertheless, the company's capital expenditure is on the decline, signalling the end of its heavy investment phase. The figure in the year reported was £106m, down from about £163m a year before. This year it is expected to be about £70m.

While Kingston was cash flow positive in the final quarter, analysts predict debt will rise to about £140m by this time next year.

Analysts at JP Morgan expect Kingston to produce Ebitda of about £43m this year on turnover of about £370m and have a short-term price target on the shares of £1. Analysts at Altium, meanwhile, reckon the stock is worth 139p. Kingston shares closed up 3.25p at 92.5p.

While that makes the company seem an attractive bet among the smaller operators, the ongoing telecoms shake-out and negative sentiment surrounding the sector means there is probably still plenty of time left to buy in.