IAWS shares likely to follow Iseq growth

Investor/An insider's guide to the market: After the very weak second quarter, the Iseq index has rebounded strongly. The index is up by more than 17 per cent since hitting its low point in June and has risen by approximately 10 per cent so far this year.

The Iseq index is trading at an all-time high and further gains seem likely going into the fourth quarter.

The heavyweight financial stocks have had a big impact on this move into new high ground. For this quarter, the share prices of AIB and Bank of Ireland have appreciated by 12 per cent and 10 per cent respectively.

Last week Bank of Ireland issued a trading update, which confirmed it was enjoying bumper trading conditions. Underlying earnings per share (eps) were expected to grow by about 25 per cent in the 12 months to end-September 2006. For the full financial year to March 2007, the bank expected to deliver "high to mid-teens percentage eps growth".

This upbeat trading statement led to upgrades in brokers' profit forecasts of about 5 per cent.

While results and trading announcements from the market's bigger companies have been generally very good, many of the market's smaller constituents have also been delivering healthy growth in sales and profits.

Last week Donegal Creameries, one of the market's minnows with a market capitalisation of just €44 million, announced a strong rebound in first-half earnings.

Underlying profits from its agribusinesses doubled and there was a €1.9 million contribution from its property activities compared with a contribution of €600,000 for the same period last year.

The first-half dividend was increased by 9 per cent to six cent per share and the group net asset value was now given as €5.46 per share, mainly due to a revaluation of the group's properties.

One of the market's newcomers, Newcourt Group, reported its first set of interim results on Monday. Newcourt listed on the IEX market in Dublin and AIM in London in November last year.

The shares were placed at 70 cent and they have since risen to 128 cent to give the company a market capitalisation of more than €100 million.

Newcourt is involved in the security sector through Federal Group and in the recruitment sector through Sigmar Group. Its first set of interim results were in line with market expectations.

Turnover was €45.4 million, up 52 per cent from the same period last year and gross profit rose by 45 per cent.

Newcourt's objective is to develop into a broadly-based outsourcing and support services group in Ireland. As well as organic growth, the group made five acquisitions in the period to June 2006, which contributed €5.7 million to revenue.

The food group, IAWS, reported its results for the financial year ending July 2006 on Tuesday morning. IAWS is one of the Irish market's success stories and is now one of its faster growing companies.

With a market capitalisation of close to €2 billion, it ranks as one of the larger second-line stocks. IAWS has two divisions: food and nutrition, and agribusiness. The food operations' main products are par-baked bread and other bakery products under the Cuisine de France, La Brea, Pierre's and Delice de France brands. The company also has a bakery joint venture with Tim Horton's in Canada.

For the financial year 2006, turnover grew by 7 per cent to €1.56 billion, while operating profits were up by 13.5 per cent, ahead of market expectations.

The US food operations were the star turn, with the La Brea brand having a particularly good year. Like-for-like sales growth was 26.1 per cent, while operating profit rose by 30.6 per cent.

The European food operations also did well, with revenue growing by 13.1 per cent. The low margin agribusiness division posted a 5.4 per cent rise in operating profit, which was much better than expected.

On a medium-term view, IAWS's par-baking activities are capable of delivering good rates of organic growth. Such organic growth may be supplemented by further joint venture opportunities and/or acquisitions.

At a share price of €15, IAWS is trading on a prospective price/earnings ratio of 16.7, which is a significant premium to the market average price/earnings ratio of 14.3.

The favourable prospects for the food business should mean that this division will contribute rapid profit growth for several years.

However, the agribusiness division will pull down the overall rate of profits growth, although it does generate cash.

In Investor's view the current rating of the stock is a fair reflection of the group's prospects and the share price is likely to move in line with the overall market in coming months.