The Week In Review: Wimpey is nearly safe as houses
Saturday 26 February 2005
Immigration from the European Union and further east has eased the skills shortage that has bedevilled the building industry for years.
Immigration from the European Union and further east has eased the skills shortage that has bedevilled the building industry for years. George Wimpey lauded the arrival of skilled labourers, which has driven down wage inflation and helped the housebuilder to drive down the costs of building a house. Together with rising selling prices, 2004 profits rose 19 per cent.
Wimpey is a geographically diverse company, its main UK business split evenly between the North and Scotland, the Midlands and the South. In addition, it has an upmarket housing business in the UK called Laing Homes, which is trading less well, and a US business accounting for a quarter of group sales, which has been turned around and is enjoying the still- booming US housing market.
The arguments in favour of a soft landing for the UK housing market are well-rehearsed: demand will outstrip supply and mortgages stay cheap for the foreseeable future. The bears picked up on Wimpey's warning that land prices have not begun falling, despite the expected slowdown in house prices - a situation which, if it continues, will put a big squeeze on company profit margins. But Wimpey has slowed down its land purchases in response, and the most likely scenario is that the two will come back into balance shortly. A price-earnings ratio of six suggests Wimpey shares are priced for Armageddon. But Armageddon is not likely. Buy.
The performance of Scottish & Newcastle, which brews brands including Fosters and John Smiths, has been as flat as a watery pint in recent years. Major cost cuts have boosted its marketing spend, increasing volumes of its key brands in the UK. But the UK and France are still tough markets, with Eastern Europe the only bright spot. Existing investors may want to hold for the income, but new buyers should get a round in elsewhere.
The maker of anti-torpedo devices for the Royal Navy announced a record set of results this week. Acquisitions have provided cross-selling benefits and cost savings. It has also won new contracts with Boeing and the Ministry of Defence. Sales of gas-compressor, cooling devices for missiles, shipped to the US Navy, reached record levels. With plenty of funds for acquisitions, buy the shares.
MILLENNIUM & COPTHORNE
"Nothing unimportant ever happens here," said the New York Plaza Hotel, which Millennium & Copthorne sold last year. So it has proved, as the sale gave rise to a special dividend. Across the rest of the company, revenues per available room are growing, but the rebound in hotel trade is not certain. We remain unconvinced there is more upside to come. Check out.
Investors in the books-to-company-reports publisher, were running for the Cornish hills this week as the group announced the surprise closure of its Caerphilly plant. The company is on a much-needed cost-cutting drive, while it suffers from intense price competition in a sluggish market. With another full financial year in the red now guaranteed, existing investors should stop their losses. For new investors, avoid.
Shares in the recruitment consultancy tumbled after investors did not get the bullish statement they had hoped for. But the group has recovered from a three-year hiring slump and is keen to expand in the United States. But the shares look expensive given that most continental European economies are far from stable. Worth holding, though, to see if Europe does recover.
Broadband Britain is gathering speed and PlusNet, the small internet service provider, is right in the middle of its uptake. High-speed internet connections, linked to TVs, will become the norm to buy film and music on demand. BT is working on this and has a close relationship with PlusNet. Its shares are on a racy multiple of 17 times, but deservedly so. Buy.
Capita, the outsourcing specialist, is already on course to make £230m out of managing the London congestion charge, and looks set to have its contract extended to 2009. It insists payment system glitches are over. Although the shares are not cheap, further growth prospects make them worth holding on to.
Car rental companies such as Avis Europe have been on a bumpy road since terrorism threats and economic slumps have been keeping travellers at home. Avis bought loss-making Budget last year, which will take two years to become profitable. There is also little prospect of price rises in continental Europe. Avoid.
Getting rid of rats is not a pretty business, but Rentokil Initial has had a very attractive performance history. Re-investment after two decades of scrimping is hurting profits in the short-term. But if Rentokil can reassert its brand, it could regain ground. Until the fumes of change settle, investors could get bitten. Wait for the traps to be checked before buying.
Don't lose your hat on B&B's plans
After focusing on niche mortgage lending and branch sales of other people's financial products, Bradford & Bingley is leaner and more efficient - yet it is also more exposed to trends in specialist lending. Its chief executive, Steven Crawshaw, who took over last March, has sold the bank's estate agency business. Gone too is its loss-making mortgage broker Charcol, and the company unveiled annual pre-tax profits ahead of expectations.
But Mr Crawshaw insists buy-to-let lending, where B&B is the number one player with a quarter of the market, will keep growing at a faster rate than the rest of the mortgage market. There are signs, though, that volumes are already slowing and margins narrowing. Buy-to-let investors are largely holding on to existing portfolios, but making fewer acquisitions. With interest rates higher now and rental income still depressed, the prospect of lower capital gains may deter new wannabe landlords. There is concern that its mortgage arrears have jumped and will keep rising this year.
The group is seen as a takeover target, though there is no reason why a predator would act quickly. The stock is 14 per cent higher than when we said avoid a few months back, but our view is unchanged.
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