Finsbury Food-Growing-Acquisition Hungry-Time to Buy?

Ah heres the reason :)

Buy Finsbury Foods at 74.5p
Says Luke Heron of Watshot.com
Finsbury Foods (FIF) has staged a comeback over the past year, both in terms of its current and future fortunes but also, its share price too. The business has now fully recovered from the raw material price increases and labour shortages that plagued 2004. The company now has almost 10% of the UK cake market sewn up, a position that has been established over a number of years and looks set to continue to grow going forward. The bigger slice of growth action has come from a series of deals, most notably one with Nestlé, which is now in its second year and has handed the company a marvellous opportunity to significantly ramp up its sales. To illustrate just how much progress has been made, the group is on schedule to create a 50 million pound turnover business at retail prices for the Nestle cake brand over the course of the five year contract. Meanwhile, the sale of land has left the business ungeared, putting Finsbury in the best position it has been in for a number of years, which in turn could and should prompt the group to adopt an acquisitive strategy.

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The past 12 months or so has proved a good period for the group, with both of its trading companies, Memory Lane Cakes and Nicholas & Harris, delivering strong performances. A major review of the markets was put into motion with a view to seeking out possible acquisition targets, a review that last month saw the company announce a couple of acquisitions. The cake businesses of Enterprise Food Group Limited; California Cake Company and Campbell's Cake Company, both of which are based in the home of healthy eating, Scotland, have been snapped up by Finsbury for a maximum consideration of 7.4 million pounds plus 3.4 million pounds of assumed debt. Finsbury has also agreed to buy United Bakeries for up to 2.5 million pounds, in a separate transaction. I imagine we won't have to wait too much longer to hear news of a further deal.

Each of the acquired businesses have strong management teams, innovative niche and market-leading products, and strong relationships with multiple retailers. The likes of Tesco and Asda, for example. So what can we expect in terms of numbers from these fresh additions to the growing empire? For the year to June 2005, the Enterprise cakes businesses had a combined pro forma EBITDA of 2.2 million pounds with net assets of circa 1.3 million pounds. At a potential cost of 7.4 million pounds, it wasn't a bad deal. So to the financials. For the year to 30th June 2005, the company delivered normalised earnings of 4.9p, paving the way for a dividend of 1.2p. For the current year, I could comfortably see this same figure come in at 5.2p. Obviously, last weeks revelations, these numbers will be much higher for the following year. Indeed, as the deals have been debt funded, the possibilities for cost savings, could and indeed should, lead to a significant uplift in profitability. So, we are left with a company whose shares trade on a prospective current year earnings multiple of 13.6, a figure that should comfortably fall below 10 next year. I believe current year earnings will be perfectly sufficient to pay a dividend of 1.4p this year. Finsbury Foods is a steady growth situation, backed by solid earnings and a progressive dividend policy. I can see an offer being made for the group sometime over the next year, it would just make too much sense for so many operations to incorporate Finsbury within their fold. At 74.5p, my stance remains, "buy".


Key Data:

EPIC: FIF
Price: 72 - 77p
Market: AIM

Luke Heron edits the small cap share trading site www.Watshot.com. It costs as little as 73 pounds a year to access tips from Luke and Conrad Windham on the site. For more details click here.