Sweet and healthy profits ahead?

On Friday I mentioned that I hadn’t added to my portfolio recently, but after some research over the weekend, I did identify an opportunity and bought shares in a company called Zetar early this (Monday) morning.

The idea came from a brief article in the FT weekend, and after some research I decided to take the plunge.

The first thing that caught my attention when researching this company was that it is currently trading on a historic P/E ratio of about 6, and yet results released last week suggest that the company has weathered a storm and is set fair for growth. Surely a P/E of 6 is far too stingy.

Zetar is essentially a producer of confectionary and healthy snacks. In their recent finals, it appears that confectionary grew very well (despite an unseasonably warm Easter), but the snacks division was hit by a very sharp rise in commodity costs in the first half of the year. The overall figures for the year were nevertheless encouraging, and in the second half of the year they have managed to pass the increased costs in their snacks division on to their customers and hence improve margins. In the first 11 weeks of the new financial year, revenues as a whole are some 6% ahead of the same period last year.

They have clearly identified a number of growth opportunities for the short, medium and long term, and have been awarded a “food gifting” license for the London Olympics 2012. They have also formed a strategic partnership with two unidentified major European companies.

The balance sheet looks pretty healthy with a net tangible asset value of about 118p per share, and a NAV of 350p (including intangibles and goodwill). They have over £4m cash on the balance sheet, and banking facilities in place with HSBC until 2014 (recently negotiated on relatively favourable terms). Free cashflow is healthy, and they have also introduced an inaugural dividend of 2.25p (about 1%) covered about 16 times by earnings.

It was a pretty upbeat forward looking statement, despite the headwinds still facing the retail environment, and surely the shares deserve a re-rating. If earnings come in around 40p next year then a P/E ratio of 10-12 gives a value of 400p-480p. This leaves a substantial amount of upside from this mornings opening price of 220.5p.

There is a nice piece written about the company on the Motley Fool where the CEO and FD gave a presentation around January (I think?). Interestingly the company seems to supply most of the major retail outlets, and the management team appear to have set ambitious but achievable targets (see article – there is a link on ADVFN).

There has been plenty of consolidation in this sector in recent times (think Cadbury’s and Uniq). In fact whilst Zetar are looking towards organic growth, they are keeping an eye out for small bolt on acquisitions, although will they inevitably become a target themselves?

All-in-all the investment case is compelling at these levels.

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P.S. Actually the real reason that I’ve bought shares in this outfit is that last Christmas we pretty much depleted our local supermarket of Zetar’s -  Bailey’s chocolates and I’m secretly hoping that, in the future, shareholders may qualify for substantial discounts. They are absolutely delicious!!!!

P.P.S. There are two technical points of interest. Firstly, the shares have been trading in a range for some time, but after this mornings rise there appears to be a positive breakout. Secondly, UBS have been and are a seller of this stock; they have recently offloaded considerable volume, but are now down to their last 3.7%. They don’t seem to be having any trouble selling, and a bit like Zetar’s chocolates, the shares are quickly gobbled up by eager buyers. I expect once UBS have finished (which isn’t taking very long) I am hopeful that the shares will make an even sharper move upwards.

Underperfomer pays dividends

In my last blog at the end of June, I intimated that I am currently scouring the market to identify potential investments. Whilst I have added a number of companies to my watch list, I have yet to take the plunge and add to my current portfolio. Patience is the key.

Meanwhile I thought I’d revisit a couple of companies that I have mentioned in the past.

Firstly Vodafone. Vodafone released a trading statement today which basically stated that trading was in line with market expectations. Of particular interest is that free cash flow is healthy and dividend targets on track. Given that the dividend is currently over 5.5%, it looks an attractive share for income seekers. It’s interesting to note that since Vodafone introduced dividend payments they have increased the payment every year except one.

I have also noted that press speculation in recent months has talked about the possibility of a Special Dividend.

As I mentioned in a previous blog, Vodafone has been an underperformer in terms of capital growth over recent years. Perhaps it will become an outperformer in the next few years?

I tend not to invest in large companies (particularly FTSE-100 companies) simply because they have less potential to multi-bag over short time periods (although the recent recession temporarily threw up one or two opportunities. I seem to remember Barclays Bank was one) and armies of people are watching and analyzing these stocks. However, if I was looking for a relatively safe haven that would provide a nice income stream then Vodafone would certainly merit further research.

Another company that released a trading statement today was the Mission Marketing Group. Again trading is in line with expectations and given that broker forecasts come in at around 4p for 2011 and 5p for 2012, it does appear that the shares are undervalued. If they do hit targets for the year then I can easily imagine the shares doubling or more from here.

 As mentioned in a previous blog, I did notice these at around 10p-11p when they were hovering around my own personal ‘margin of safety’ criteria. Since I am essentially a long term investor, I probably won’t buy shares in TMMG because it’s not the type of business that particularly appeals to me. However, if I had allocated some trading money then it looks good for a short/medium term bet.

Finally, Surgical Innovations released a RNS regarding a 5-year $8m agreement with SI US. This is one that I did own and sold for a five fold profit. As I stated at the time, the future does look bright for this company and I am sure there is further upside in the share price in the short, medium and long term and good luck to shareholders. However, the decision to sell my holding here was the right one for me. Sometimes the right time to sell is a very personal decision which can depend on a whole variety of reasons.