Fyffes must look beyond fruit

It is difficult to see what Fyffes is doing wrong that would justify the share's dismal performance since the beginning of the year. On the face of it, Fyffes is the blue-chip of the fruit distribution sector and certainly has performed a lot better than its two big US rivals, Dole and Chiquita.

Both US giants are now trading at 12-month lows and at half the level of a year ago. In contrast, Fyffes shares are roughly where they were a year ago, but are still down more than 20 per cent on the beginning of this year and have also under-performed a falling Irish market by in excess of 13 per cent since the beginning of the year. Is that sort of performance justified?

Certainly, Fyffes shares will always trade relative to competitors like Dole and Chiquita - the former a suitor of Fyffes a few years ago, the latter one of Fyffes former shareholders. But there are fundamental differences between Fyffes and its US rivals which justify some sort of premium against Dole - not the discount that the current price in the market implies.

Fyffes might be trading at a hefty premium against Chiquita, but this is more a reflection of the market's distaste for Chiquita paper than anything else, with Chiquita trading on little more than six times prospective 2000 earnings.

So why should Fyffes be put in a different and better-rated category than Dole and Chiquita? For a start, Fyffes has very cutely hedged its bets against forced changes in the EU banana regime - by very astutely building up supplies of both ACP and dollar bananas long before the banana battle between the US and the EU boiled over. Whatever way the banana battle ends, Fyffes is covered. The same cannot be said for the dollar banana-dependent Dole and Chiquita.

Another factor is Fyffes' move to broaden its base and add to its portfolio of brands by the link-up with South African group, Capespan, which sees Fyffes earn a 50 per cent stake in Capespan's operations in Europe, a 10 per cent stake in Capespan itself and get access to premium brands like Outspan and Cape. Add in a balance sheet weighed down with cash and Fyffes looks a more attractive prospect.

But having bundles of cash is not necessarily a benefit when interest rates are very low. No doubt the market would be more impressed if Fyffes began spending its cash pile more quickly on acquisitions. Buying in shares is all very well, as a way of boosting earnings per share and underpinning management's belief in the value of the shares, but over the past six months it simply has not worked.

Since March, Fyffes has bought in 2.6 million shares at a cost €5.3 million (£4.17 million), but at rapidly declining share prices. Last March, Fyffes bought in 200,000 shares at €2.28 each, but successive purchases have been €2.22, €2.20, €2.12, €2.10, €2.05, €2.00, €1.95, €1.85, right down to the €1.77 and €1.75 paid for more than 763,000 shares in the past week.

Some shareholders have obviously done well from this spate of share purchases, but the question must be asked whether it is the best use of free cash - given the market's unwillingness to accept the prices paid for the bought-in shares as a floor for the share price.

Fyffes has always made a virtue of sticking to what it says it does best - buying and distributing fresh produce in European markets. But it was noteworthy this week that its arch rival in the Irish market, Keelings, a group with very close links to and distributors of Chiquita produce, completed a £20 million deal to operate Tesco's centralised distribution centre in Ballymun.

SuperValu has already built its own centralised distribution centres in Dublin and Cork, while both Dunnes and Superquinn are thought to be planning similar moves. Would it make sense for Fyffes to use its distribution and logistical know-how to do a Tesco/ Keelings-type deal with another of the major Irish retailers?

Fyffes already has its Gillespie distribution operation business - recently merged with Allegro. It makes sense now for Fyffes to look for larger distribution opportunities, outside its fruit-and-vegetable speciality.