Investment Column: M&A hype is not enough protection at SSL

Author: Edited by Alistair Dawber

Share price: 635p (-7p)

At the height of the downturn, SSL International, maker of Durex condoms and Scholl footcare products, used to say that its strong performance was helped by couples not having enough money to go out, and got bored spending night after night in front of the TV.

Despite the nuclear winter thawing, SSL’s impressive performance has continued unabated, with the group announcing yesterday that six-month sales to 30 September were up 20 per cent, helped by surges in sales of its Play range of sex toys and lubricants and a boost in demand overseas. The figures included Russian sales, where SSL recently bought the most popular brand of condom.

So with no trouble getting the numbers up, investors should be encouraged that a punt on SSL is solid one.

The problem, perhaps, is the group’s strong performance, with the share price jumping by 40 per cent in the last six months. Watchers at Cazenove think that this has been partly caused by merger and acquisition (M&A) movements involving other groups, which, they argue, “highlight the potential for a return to corporate M&A activity, particularly highlighting the attraction of strong consumer brands”.

SSL has been mentioned as a potential target for Reckitt Benckiser, and any bid would, of course, send the shares skyward. Its chief executive, Garry Watts, argues that it is innovation and realising the potential of the group’s brands that will see the share price rise, and while he refuses to rule out more buys, he says the Reckitt rumour has been around for as long as the nine years he has worked for SSL.

We agree that SSL is well run and that M&A activity will drive the shares. We would take a breather, however. The stock is pricey, trading on a forward price-earnings ratio of 15 times and offering a dividend yield of just 1.6 per cent, and we would wait for some softening before buying. Hold.


Our view: Buy

Share price: 156.9p (-2.1p)

Unlike many major mining companies, Ferrexpo, the Ukrainian-based iron ore pellet producer, had a good downturn. While most were mothballing operations as steel mills cut production, Ferrexpo was able to maintain output at 100 per cent, helped by its own port, which allowed it to switch exports to China when European steel producers turned them away.

The group did suffer from increased freight costs, but the reopening of the European sector has allowed it to switch again and benefit from more lucrative contract prices in Europe.

For investors, however, the group suffers from the old problem that afflicts most one-commodity operators: its share price pretty much tracks the iron ore price. The group’s business development director, Gavin Mackay, argues that the current price only includes Ferrexpo’s production value, making the stock undervalued. He is not the only one, with watchers at Bank of America Merrill Lynch arguing that they see a stronger than already seen recovery in iron ore and steel prices.

Analysts at the house broker, Cazenove, also argue that the stock is cheap: “We are increasingly of the view that a relatively cheap valuation for Ferrexpo’s core operating assets looks attractive in the context of progressively increasing European steel production and tightening pellet market… On our revised numbers, the valuation stands at 11.5 times 2010 price earnings and 7.9 times enterprise value to Ebitda.”

We would be buyers of Ferrexpo on account of an improving market and because it has some encouraging development plans. However, the board is expected to make a decision on the deferred dividend at the end of this month. Buyers today should consider their position if the dividend is not reinstated. Buy.


Our view: Buy

Share price: 372p (+14.5p)

SDL provides clients with translation software, for companies from Merrill Lynch and Dell to Best Western and Virgin Atlantic. Groups that have operations outside their home markets and need to translate their websites often turn to SDL.

Yesterday it published its third-quarter results, saying that performance was in line with consensus. Revenue and profits came in slightly ahead of 2008, a strong performance after the credit crunch spending freeze.

Its results were helped by the weak pound, with 80 per cent of its revenues coming from abroad, but the management says the market is stabilising, with order books up 10 per cent.

SDL has pretty good growth prospects as spending has restarted, and it reckons that if any company goes global, “sooner or later they arrive at our doorstep”. It also has the backing of some heavyweight investors, including BlackRock and Axa. With a price to earnings of 12.9 times current earnings against a sector on 13.5 times, this looks worth a punt. Buy.

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