Shift in investment sentiment

At the Fyffes annual general meeting last April, chairman Neil McCann caused a ripple when he warned that half-year profits would be lower than the market was expecting and the outcome for the full-year was uncertain.

Now, not only has Fyffes caused another surprise with profits, earnings and dividends well ahead of analysts' forecasts, the company is now talking more positively about the future than at any time over the past five years.

The fact that the Fyffes share rose yesterday when the rest of the market was taking a dive is an indication of how sentiment towards the share has changed so dramatically. A price of 120p has until now been seen as a ceiling for the shares, but now analysts are saying that 120p may be a floor for the shares and that a new trading range between 120p and 150p is a reasonable target.

The unexpected improvement in Fyffes' fortunes in the second half of the financial year is primarily accounted for by a substantial improvement in banana prices in Europe and an excellent performance from the Geest associate on the continent.

Nine months ago, analysts were expecting a sharp fall in operating margins for Fyffes - instead the group was able to boost its operating margins from 3.5 per cent to 3.7 per cent, while some of its competitors, notably Chiquita, have taken a savaging on world markets in recent weeks.

Even the expected changes in the EU banana regime - once seen as a serious danger to Fyffes' future earnings growth - is unlikely to be a major factor for the Irish group. Mr McCann said that he expects the EU to accept the changes to the banana regime demanded by the WTO, but that this will not have an adverse affect on Fyffes with the Irish group retaining its share of "dollar bananas" allowed into the EU.

"The WTO has not condemned the system, it just wants it carved up in a different way and the re-carving of the cake won't affect us negatively," said Mr McCann. The fear that changes to the banana regime would severely affect Fyffes is one factor that has kept the share price under-performing the market. If the changes to the regime are as benign as the Fyffes chairman believes, then it is one major negative that will be eliminated.

The banana regime has also been one factor that has inhibited Fyffes' efforts to broaden its shareholder base. About 20 per cent of the shares are currently overseas.

"If that went to 30 per cent, it could mean a significant change in the share price," said deputy chairman Carl McCann.

The strategy in the year ahead will be focused on growing earnings per share - through organic growth and also through acquisition. Last year was a relatively quiet one on the corporate front for Fyffes with just £26 million spent on two acquisitions in Ireland and Holland.

But with £89 million cash in the balance sheet, Fyffes is now setting its sights far higher. Mr McCann said that the group would have no trouble financing an acquisition bigger than the £150 million deal it financed for buying out Geest and analysts believe that the company could pay well over £200 million without putting itself under any pressure.

The search for acquisitions will be focused on Europe. "It doesn't really matter where, but if we could add to countries where we are really established such as Holland or Spain, we would be very happy. Our ambition is to do bigger deals," said Mr McCann. Analysts said, however, that it may be difficult for Fyffes to find an acquisition of such scale in continental Europe and the group might have to look outside the EU for an expansion of that size.

If the search does move outside the EU and its stable banana importation regime, then Fyffes may have to cope with a more volatile environment.

This year's results show clearly that Fyffes fruit distribution business is becoming increasingly volatile with the company's fortunes changing to an extraordinary degree in the space of a few short months. But analysts - who were caught way short with their 1997 forecasts - are likely to upgrade their 1998 forecasts significantly and boost earnings forecasts to around 11p per share.

On this basis, Fyffes will be trading in the market at undemanding 10 times prospective earnings while its multiple of just over five times enterprise value is also seen in the market as a very attractive rating.

A few weeks ago, Chicago investor Mr David Herro said that Fyffes was extraordinarily cheap compared to Chiquita and Dole. Since then, Chiquita's share price has taken a dive after a profits warning while the Fyffes share has risen over 15 per cent. The rating gap against Chiquita and Dole may have narrowed, but the Irish group is still trading on a substantial discount to its two American rivals.

The Fyffes share rose yesterday in a market which fell two per cent. If world markets stabilise after the latest bout of Asian flu, then there may further growth for Fyffes shares in the months ahead.