The Investment Column: Challenging time for UB's sales line

UNITED Biscuits has proved a dismal investment over the past five years, but the company was expressing confidence yesterday that it is now turning the corner. It has cleared out disasters like the Keebler business in America and last November it conducted a pounds 241m asset swap with PepsiCo under which it sold its French and Australian snacks operations in return for PepsiCo's French biscuit business. The deal has enabled United Biscuits to return pounds 150m to shareholders which will be effected by the issue of "B" shares that will then be bought back.

UB's pruned portfolio is now organised into two divisions - the McVities biscuits business and UK foods which takes in snacks, chilled and frozen foods. The plan is to concentrate more on its core banded products like Penguin, Hula Hoops and Skips as well as its new Go Ahead range of low-fat snacks and less on own label goods supplied to the supermarkets.

Management seems more focused on shareholder value. It has cut costs and concentrated on building margins which rose by a full percentage point last year. The challenge now is to build the sales line which didn't budge at all in any of the divisions last year.

This is promising much, but the City is not sure management can deliver. Pre-tax profits before exceptionals fell by 3 per cent to pounds 106.2m last year though UB says this was due to the decline in businesses now discontinued. But in the UK, which is UB's main market by some distance, sales were flat even after stripping out lower exports because of the strong pound and pounds 12m from the sales of businesses. However, management has drawn some comfort from achieving sales growth of around 5 per cent in the last quarter of last year and the first two months of this one.

Delivering longer term sales growth will test UB's marketing skills and will be made more difficult given the cut- throat market in which UB operates. Eric Nicoli, the company's long-standing chief executive, says regional dominance is much more important than global scale, but the fact remains that UB is a pounds 1.4bn company up against huge competitors like PepsiCo and Nestle.

It is looking at bolt-on acquisitions and with gearing halved to 17 per cent it could afford more share buy-backs, but the strong run of the last two months now has the shares looking fully valued. The shares fell 6p to 263p yesterday and assuming full-year profits of pounds 120m this year, they trade on a forward rating of 16 and yield almost five per cent. Given the scale of the challenge that looks high enough.