MARKET COMMENT
More Cheap Companies With Valuable Brands

By David Kuo (TMFDragon)
September 9, 2003

About a year ago, I had a poke around a trio of cheap companies that had valuable brands. These were PZ Cussons (LSE: PZC), the maker of Imperial Leather toiletries, SSL International (LSE: SSL), famous for its Scholl footwear & Durex condoms and Mayborn Group (LSE: MBY), which manufactures the Tommee Tippee range of infant feeding items.

All three businesses were valued at below 12 times prospective earnings back then with Mayborn Group's forward valuation of just 8 times earnings making it look especially attractive.

At that time, shares in PZ Cussons were changing hands at 830p and today those shares are worth 1037p, a rise of 25%. Meanwhile, shares in SSL International, which were trading at 302p, are today worth 350p - that's a gain of 16%. Finally, Mayborn Group's shares were worth 78.5p a year ago, and they are today trading at 132.5p. That has, without doubt, been the best performer of the lot, a rise of 69%.

The valuations of those companies have kept pace with earnings growth, and even at today's prices the shares do not look overpriced. Flushed with success, I thought I'd look to see if there were any other similar companies on offer and I came up with three more contenders.

First up is Aga Foodservice Group (LSE: AGA), the maker of the lifestyle-driven Aga branded stoves. Aga has ambitions to take its brand from what is currently a predominantly European customer base to America, where it hopes to make significant inroads. Aga is not that small a business, and its shares, which trade at 224p, value the company at £289m. The company is debt free, making its P/E of 10 all the more attractive.

AG Barr (LSE: BAG) is another bubbly looking outfit. The fizzy drinks maker, which makes Irn-Bru, Tizer and Orangina in the UK, delivered pre-tax profits of  £12.2m last year. Earnings are expected to improve 5% this year, and its shares, which are quoted at 596p, value the company at 12 times prospective earnings. Even tastier is the 4.2% yield, which is covered 1.9 times.

Finally, Victory Corporation (LSE: VRY) is perhaps the most speculative of the three cheap companies that have great brands. The company holds the licence to Virgin Cosmetics, and whilst Victory is not expected to make a profit this year, profits have been pencilled in for both 2004 and 2005. The shares, which stand at 260p, value the company at 8 times profits for 2004.

It is worth mentioning again that niche players may well appear inexpensive. These companies might even possess what are perceived to be valuable brands. And few would deny that Aga cookers, Irn-Bru and Virgin are household names. However their "cheapness" must be seen in the context of the inherent risks associated with these businesses.