Derek Pain: Connaught sneezes and the social housing sector catches a cold
No Pain, No Gain
Saturday 10 July 2010
In these nervous days the merest whiff of trouble is likely to have a tumultuous impact. Take the problems engulfing Connaught, the support services group that is big in social housing. A shock profits warning sent waves of unease through the social housing sector and devastated Connaught's own share price. The impact, of course, would not have been so severe in more serene days, now of blessed memory. Indeed Bob Holt, chairman of Mears, another social housing group, must feel he is a victim of hysterical investors.
Still, there is no doubt that many have been unnerved by the Connaught drama. Mears shares, constituents of the no pain/no gain portfolio, have endured that sinking feeling since its arch rival caught its shareholders on the wrong foot with its dismal bulletin. Connaught's shares – once enjoying glamour status – took a pounding, falling 66 per cent in three days. Other groups involved in social housing felt the fall out. Mears, for example, tumbled from 280p to around 230p. Earlier this year the shares topped 310p.
Mears' slide would probably have been more severe if Mr Holt had not fought back. He issued two upbeat trading statements and told anyone who would listen that Connaught's difficulties did not indicate sector-wide problems. Connaught, hitherto regarded as leader of the social housing pack and for long enjoying a stronger share rating than Mears, said 31 contracts had been trimmed in recent months and worried about the impact of the coalition's emergency budget on its business. It added profits would be hit. But some observers wonder if Connaught has encountered yet-to-be-defined difficulties. In contrast Mears talked of strong trading and declared it had seen "no evidence" of any downturn. To rub salt in the Connaught wounds, Mr Holt claimed Mears was now the social housing leader.
Uncertainty about Government cuts will continue to influence shares for some time. Indeed many outsourcing groups could suffer acutely if Chancellor George Osborne's measures are anywhere near as fierce as currently indicated. But it is worth noting that housing associations, which represent a large part of the social housing market, are non profit-making organisations, relying mainly on rents for their income. They are not, therefore, beholden to the Government for cash and should emerge from any cost-cutting exercise relatively unscathed. Other portfolio constituents have produced results or trading statements. Private & Commercial Finance, the hire purchase group, more than doubled year's profits to £528,000 and claimed it was "ideally positioned with much reduce competition". The shares hardly stirred.
Clarity Commerce Solutions – supplying software to the leisure and retail business communities – achieved higher-than-expected profits of nearly £2m against £471,000. Its shares made progress. Both represent excellent value, but I would not bet on either progressing until stock market sentiment improves.
Hargreaves Services is a constituent feeling the pinch. A trading update was positive but mentioned that coal production had slipped due to problems at its Maltby mine in Yorkshire. Still year's profits – due in September – should not disappoint.
Nighthawk Energy, the US-focused group, has extended its oil and gas spread. With its partner, the US Running Foxes operation, it has acquired a further 4,773 acres containing 42 wells. The additional land is adjacent to existing operations. Price has not been disclosed.
Whitbread's trading update, covering the first 13 weeks of its current year, saw sales a heady 13.1 per cent ahead. It again enjoyed a strong run at its Costa Coffee off-shoot, with sales up 26.9 per cent and its Premier Inn budget hotels side also made a significant contribution with turnover 14.1 per cent higher. The group has so far survived the recession in fine style; it should continue to do so. The shares have topped 1,600p this year but, despite advancing following the trading statement, seem to have settled around 1,300/ 1,400p.
I was caught on the hop last week. Brewer Daniel Thwaites rolled out figures after I finished writing. They were pretty awful with pre-tax profits down to £1m from £9m. Still a 4.46p year's dividend is being paid and the assets argument, which I mentioned, remains in place.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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