Between the lines: Tunnel's end now in sight

When David Hearn told journalists yesterday that Goodman Fielder's ingredients division could see the "light at the end of the tunnel - and it's not an oncoming train," he could have applied his comments equally to the whole company.

After several years of shaky results, stemming from both internal issues (including overzealous diversification) and external factors (stiff competition in low margin, core business areas), the company has produced a solid annual result.

This has prompted analysts to tone down their cynicism and be cautiously optimistic.

With pre-abnormal profits gaining a very healthy 24.2 per cent to $A130.9 million ($165 million), pre-tax earnings margins improving from 6.4 per cent to 8.1 per cent, and cashflows firming to $267 million, management and stakeholders are breathing a collective sigh of relief.

But will confidence in the company, which has been on the wane for many years, return to the market? As Larry Gandler at Credit Suisse First Boston says, "it will take time ... to appreciate the value in [Goodman Fielder]."

This time around, an exhausted management presented results which showed the tangible effects of the company's massive restructuring process, with no small hint of pride. But its shares still languish around the 125c mark. That's an improvement on March's 111c, but down on last month's 135c, and light years away from the discounted cashflow valuation of 182c given by CSFB, who predict the company will experience double-digit post-tax profit growth by 2002.

Most analysts agree that Goodman Fielder will start to fully reap the rewards of around $64 million in cost savings. Based on this they have upgraded their investment views to fit the cheerful corridor between "accumulate" and "strong buy," as opposed to the familiar territory of "neutral" to "strong sell."

What analysts seem to be crediting Goodman Fielder with is the right choice of strategic path. Essentially, the company has recognised better bottom lines will come most quickly and cleanly through cost cutting. It has achieved much through streamlining its businesses, dropping non-core operations and massive restructuring in milling plants.

While Mr Hearn and his managers flail about excitedly at the thought of new product ranges, these types of forays and aggressive bolt-on acquisition strategies should be on hold until a trimmer platform for growth is established.