Tea dominates operations

The company operates in agriculture, engineering and food service. But trading profit from growing stuff such as tea, macadamias and avocados – the firm’s core crops – came in at £35.6m for the year, while the engineering division lost £2.6m and Food Service made £1.8m. Agriculture dominates the accounts, and despite the company growing lots of other stuff such as pistachios, wine grapes, almonds and pineapples, tea is the biggest operation.

Today’s full-year results show that revenue came in 16% higher than a year ago and profit before tax moved up 4%. The directors moved the total dividend 3.8% higher. But Camellia is one of those perennial stocks, with often-tempting showings on quality and value metrics, that never really goes anywhere much for investors. We get clues about why that might be in the language the firm uses to describe itself: “We see ourselves as custodians, holding our businesses in trust for future generations,” and “we recognise that people and businesses take time to establish and grow to their full potential and we are happy to wait for that to happen.” Then there is “profits are our lifeblood but not our soul.”

Beware of the opportunity cost of holding

Okay. The company ethos is laudable, and it will go a long way towards securing continuity of employment and income for the directors, employees, farmers and others that serve the business. The company’s responsible trading practices will be good for the environment and communities where operations take place. I don’t even think you’ll lose much money with an investment in Camellia. But I can see more potential for my money to work hard for me in other investments, so I’m avoiding Camellia and would rather take my chances on Saga’s (LSE: SAGA) turnaround and growth story.

Saga operates insurance, travel and other emerging businesses serving the over 50s, and during April the shares have been creeping back up after plunging around 40% following a profit warning in December. In this month’s full-year results report, chief executive Lance Batchelor explained that, although the market is challenging, Saga hit profit expectations that were rebased at the end of 2017. There was a “modest” increase in underlying profits and the firm is “highly” cash generative.

Undemanding valuation

In a sign of the directors’ faith in the immediate outlook and their long-term plans for growth, they pushed up the full-year dividend by almost 6%. Meanwhile, City analysts following Saga expect earnings to decline by 5% for the trading year to January 2019 and rise 2% the year after that.

Today’s share price around 131p throws up a forward price-to-earnings ratio of just under 10 for the year to January 2020 and the forward dividend yield is running around 7%. The stock looks cheap and I think it is attractive.

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Against this backdrop though, Morrisons (LSE: MRW) seems to have significant investment potential. Here’s why it could be worth buying ahead of one sector peer in particular.

Strategy

Under its current management team, Morrisons has made a range of changes to its business model. It has focused on improving its financial strength, with debt reduction being a key aim for the company. This should provide it with greater financial flexibility if there is a difficult period for the UK retail sector. Furthermore, lower debt levels may lead to improved investor confidence and a higher share price over the medium term.

In addition, the company has leveraged its status as a major food supplier by teaming up with Amazon via its online grocery service. This is a capital-light venture for Morrisons and should deliver strong sales growth without major investment. Similarly, its resurrection of the Safeway brand gives it access to the fast-growing convenience store market. This could increase sales and profitability while also commanding low initial investment.

Growth potential

Looking ahead, the company is expected to report a rise in its bottom line of 14% in the current year. This is around twice the growth rate of the wider index and shows that its strategy is performing well. Despite this upbeat outlook, the company trades on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests that it offers a wide margin of safety. This could allow it to deliver strong share price growth, as well as limiting its downside risk.

Clearly, the outlook for the company is uncertain. The UK economy could experience a difficult period. However, with a sound strategy, improving financial position and strong growth potential, Morrisons seems to be an excellent buy for the long term.

High price

While Morrisons may be worth buying, fellow consumer stock Camellia (LSE: CAM) could be a stock to avoid. The diversified consumer goods company, which focuses on tea and coffee, reported a profit from continuing operations of £1.9m on Friday in the first half of its financial year. It struggled due to poorer prices for tea in India and Bangladesh, although it benefitted from higher volumes and prices for soya and citrus. Furthermore, it has been able to substantially improve its profits in Food Service, Associates and Speciality Crops.

The company is expected to deliver a pre-tax profit of £19m in the current year. While this may be a solid result given its difficult trading conditions, its forward price-to-earnings (P/E) ratio of 100 suggests that the market may have already fully priced-in its outlook.

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Risky long-term growth

I’m talking of Camellia (LSE: CMA), a holding company that owns this array of diverse companies, and which released full-year results on Thursday. Right up, I’m impressed by the company’s stated ethos which includes “We see ourselves as custodians, holding our businesses in trust for future generations” — the kind of long-term focus that I very much favour.

But other than that, I find this set of results admittedly tricky to evaluate. Revenue from continued operations rose by 5% to £257.9m, with headline pre-tax profit from continuing operations pretty much flat at £26.5m.

But there’s an apparently big whammy from the disposal of the firm’s interest in Duncan Lawrie Private Banking Group. That generated a one-off charge of £20m, and contributed to a bottom-line net loss of £5.9m and a reported loss per share of 387.4p. However, chairman Malcolm Perkins points out that the firm’s expected gains of £19.2m from the disposal have not been included in these 2016 results, as the timings involved will push it into 2017’s figures.

Overall, then, though Mr Perkins does describe prospects for 2017 as uncertain, the company was confident enough to pay out a slightly increased dividend this year, of 130p — which provides a modest yield of 1.1%.

Investors didn’t seem too concerned by the uncertainty facing the company, with the shares down only 1% to £110 apiece as I write. There’s certainly some short-term risk here, but I could be tempted by Camellia’s long-term growth prospects — though I might wait for updated forecasts.

Just keeps giving

For a less risky and more confident growth opportunity, Persimmon (LSE: PSN) seems to be one of those that just keeps giving. Sure, the double-digit EPS growth that has characterised the past five years has to slow, but even at the lower rates of increase forecast for the next two years I’m still seeing no reason to fear for the firm’s long-term growth prospects — and what we’re also seeing is a very healthy and well-covered dividend.

A trading update on Thursday said that “Persimmon’s operational performance continues to be excellent“, and revealed an 11% rise over 2016 in forward sales revenue to date with a 4.1% rise in the builder’s average selling price.

As part of its capital return plan, Persimmon paid out 25p per share in surplus cash in March, and has reaffirmed its plan to pay a further 110p this year — and that 135p represents a yield of 5.8%.

The share price put on 2% in response, reaching 2,332p in early trading, and it’s now up 75% since the depths of last summer’s post-Brexit crash (and it’s nearly quadrupled in the past five years). Those who joined the irrational sell-off in the days following 2016’s EU referendum must surely be kicking themselves now.

Unlike some, I don’t see Persimmon’s prospects as being dependent on booming house prices, but instead on the long-term shortage of supply in the UK. Even with level or even cooling prices, I see many years of profit growth still to come.

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To be fair to Camellia, full-year results announced today did show the very diversified group moving from a £3.1m loss last year to a £4.9m pre-tax profit over the past 12 months.

However, the chairman summed up my hesitancy about Camellia’s future when he warned today that “the outlook for the group continues to be mixed.” Mixed is exactly the word I’d choose when the company has to fret about drought in South Africa affecting its agriculture business, lower UK interest rates affecting banking operations and the Brexit vote lowering demand for engineering services.

There are many good reasons conglomerates have gone out of favour with investors and despite turning a profit this year, I’ll be steering clear of Camellia and its varied interests.

Housebuilder to watch?

Given the spectacular collapse of the Irish housing market during the Financial Crisis investors would be forgiven for not wanting to touch the sector with a 10-foot barge pole. The latest results from Irish homebuilder Cairn (LSE: CRN) suggest it may be time to take a closer look, though.

Interim results for Cairn showed the company making good progress in transitioning from acquiring development sites to the second phase of actually building homes. After last year’s IPO and a recent rights issue the company has access to  €167m of cash and debt to see it through the construction process.

Most importantly, the housing market in Ireland isn’t what it was before the Crisis. Instead of building vast suburbs far away from population centres to take advantage of tax breaks, as was done in the boom years, Cairn is focusing 90% of its projects on Dublin, where there’s a severe shortage of quality housing. It’s still early days for Cairn, with only 112 homes sold so far, but I’ll be watching closely in the coming quarters to gauge how completions are progressing and whether margin targets can be maintained.

Wait and see

It was all good news today for Scottish TV channel STV (LSE: STV) with interim results showing revenue up 5%, operating profits up 28% and net debt down a full 17% year-on-year. That said, a fair bit of this success can be placed at the feet of improved productions from ITV, where STV sources the content it doesn’t produce itself.

With the future of terrestrial TV looking increasingly bleak, STV is attempting to increase the percentage of revenue coming from in-house productions and digital sales. Over the past six months these businesses did increase revenue by 100% and 50% respectively but together still only account for 12% of group revenue.

These divisions will be critical in order to secure success in a future where ad revenues are likely to decrease and owning quality content will be king. With shares trading at a relatively tame 8.5 times forward earnings and a 2.8% yield on offer, I’ll keep watching STV to see how these two business lines progress but wouldn’t take the plunge just yet.

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Looking ahead, the prospect of a further 50% fall in its valuation may seem real, but in reality Standard Chartered has a much greater chance of doubling. That’s because the Asian economy holds exceptional promise for financial services companies such as Standard Chartered, with take-up of products such as pensions and credit likely to soar in the coming years as the middle class expands.

Even in the short term, Standard Chartered has strong growth potential. In the current financial year it’s expected to return to profitability and then record a rise in its bottom line of 153% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which indicates that there’s scope for a doubling in its valuation. Certainly, it may remain volatile, but Standard Chartered offers a very enticing risk/reward ratio.

High valuation

While Standard Chartered has endured a tough 12 months, shares in data intelligence service provider GB Group (LSE: GBG) have surged by 47%. This is at least partly because of the company’s excellent track record of growth, with GB Group’s bottom line rising at an annualised rate of 37% during the last four years. And while further growth is forecast for the next two years, GB Group’s shares may struggle to replicate their recent past performance.

A key reason for that is the company’s valuation. Following such a strong period of growth, GB Group now trades on a price-to-earnings (P/E) ratio of over 31. While its bottom line is due to rise by 9% this year and by a further 14% next year, GB Group’s PEG ratio of 2.2 lacks appeal and as such, its shares could come under a degree of pressure. While a 50% fall seems unlikely, there appear to be better options elsewhere.

Wait for a better price

Meanwhile, shares in Camellia (LSE: CAM) have fallen by 10% year-to-date due to challenging market conditions. The diversified agriculture and investment company has seen weakness in its engineering division from the low oil price, while record tea production in Kenya has caused pricing to come under severe pressure. As a result of this, Camellia is forecast to post a fall in its bottom line of 46% in the current year, which has the potential to hurt investor sentiment yet further.

With Camellia trading on a P/E ratio of 33, it appears to be somewhat overvalued given its growth prospects. And while it’s a very well-diversified business with a bright long-term future, it seems prudent to await a lower share price before buying-in. While a fall of 50% seems unlikely, Camellia’s shares could become more attractively priced over the coming months.

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