Farepak takes a gamble

THE INVESTMENT COLUMN

Supplying Christmas hampers has been a lucrative little niche for Farepak. Profits have grown steadily through the recession and beyond, with 1990's pounds 2.91m rising impressively to pounds 7.11m in the year to April, 17 per cent up on the previous year.

Farepak is gambling that it can work the same magic on door-to-door sales of housewares with the acquisition of the homecare business of Kleeneze.

The company is paying pounds 9.25m now, with a further pounds 3.4m depending on the extent to which the first full-year profits exceed pounds 1.62m.

On the face of it, that is a pretty tall order. Homecare has had its share of problems under previous management - sales soared from pounds 18m to pounds 29.4m in the 12 months to last August, but serious credit control difficulties led to a large pounds 800,000 bad debt.

Kleeneze has cleaned up the business and Farepak is confident that homecare can reach the earn-out figure next year, although it is likely to only break even after finance charges in the current period.

The idea is that the present distribution systems and network currently used for only part of the year in the run-up to Christmas can now be better utilised.

Farepak's figures prove that it can handle the difficult logistics of Christmas selling, but dealing with an army of salesmen and women may prove very different from its core mail-order operations.

Meanwhile, Kleeneze is getting a respectable price for a division that made underlying profits of pounds 1.3m in 1994. The sale will leave it with pounds 8m in the bank and focused on its faster-growing Innovations mail-order catalogue business.

If Farepak makes pounds 7.8m this year, the shares, down 16p at 334p, stand on a prospective multiple of 15 and look high enough. Kleeneze, up 16p to 144p, may also be discounting an overly-bright view of the future. Profits of pounds 900,000 in the 12 months to the end of this month would give it a prospective price/earnings multiple of 25.