Investment Column: A bundle of joy from Mothercare

Strong beast in the house-building sector; Optimistic Ultimate says it has the right theme
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The Independent Online

Women across the UK have long gazed fondly towards Mothercare at the first sign of their pregnancy. It is one of the best-known niche brands on the high street, but over recent years the drab and old-fashioned stores for mother and baby have left customers disappointed.

Women across the UK have long gazed fondly towards Mothercare at the first sign of their pregnancy. It is one of the best-known niche brands on the high street, but over recent years the drab and old-fashioned stores for mother and baby have left customers disappointed.

A new chief executive (Ben Gordon, formerly of Disney Stores), a store refurbishment programme, and a new product range have given birth to a more appealing Mothercare. The company said yesterday that sales were up 4.8 per cent in the first 15 weeks of the year. This shows a little slowdown from the first seven weeks, when sales were up 5.7 per cent, but the chain is still delivering a healthy sales performance in a dreary time on the high street. It also said gross margins were holding up during its summer sale period. Some 63 of its 162 store have now been refitted.

This has been a long turnaround for Mothercare, which was carved out of the Storehouse empire when Philip Green bought Bhs in 1999. It has struggled to update its range and felt competition from supermarkets bringing cheap, fashionable maternity and child wear to their shelves. Even Topshop now sells a range of trendy maternity clothes and Baby Gap and Next have cornered the higher end market.

But Mothercare itself is now getting trendy, and Ugg-esque boots for girls will be available in stores this winter. Also hitting the shelves over the coming weeks are specially packaged gift sets for new-borns and a new clothing range for premature babies.

Readers who followed our advice in May last year have a bundle of joy in their portfolio. Now at 12 times 2005 earnings, there is still potential for further earnings upgrades as the new product range is pushed out and the refurbishment programme is completed.

After a period where cash was haemorrhaging out of the company, it is now cash positive. So while its present dividend yield is a paltry 1.2 per cent, the prospects here are also improving. One to nurture. Buy.

Strong beast in the house-building sector

No surprise to hear a housebuilder warn that "the risks of a market reversal are higher than usual". Yesterday, this was Abbey, the Dublin-based group, which has built 385 homes in the UK in the past year, and a further 407 in Ireland.

Its results were great, of course. Profits rose 24 per cent to €60.2m. As well as the obvious overheating of the UK housing market, Ireland is also enjoying 11 per cent house price inflation. Here, rising interest rates, and across the Irish Sea, the increasing numbers of new homes being built should conspire to a much smaller improvement in selling prices for Abbey in its new financial year.

And that will feed through into weaker operating margins, and flat profits next year if it doesn't manage to increase the numbers of homes completed.

The interesting thing about Abbey is how it is responding to the threat of a slowdown. It is investing further afield, and has just bought land with residential planning permission in Prague, the fast growing capital of the Czech Republic, a new European Union member.

While the immediate outlook is weak, Abbey remains financially strong. With one of the best operating margins and returns of capital in the industry, it is a supremely efficient beast. It has cash reserves of €67m and boosted its dividend substantially yesterday so that the shares now yield 3.5 per cent against an industry average of about 3 per cent. The 8.5p dip in the share price to 576.5p yesterday puts the stock on little more than 6 times, in line with a chronically undervalued sector. It looks worth holding.

Optimistic Ultimate says it has the right theme

On the day when Regent Inns, the owner of the Walkabout chain of high street bars, slashed its dividend and bemoaned again the tough competition for the UK's drinkers, the theme bars group Ultimate Leisure could be forgiven yesterday's sideswipe at its whingeing rivals.

Telling shareholders to expect annual results at the top end of current City expectations, Allan Rankin, the Ultimate chairman, said: "The consistent, successful track record of the group demonstrates that the right product in the right location on the high street can succeed and generate increased shareholder value."

Ultimate was formed in Newcastle and is still focused in the North-east, although it has built up a presence in Northern Ireland. Rather than rolling out particular brands, it tailors its venues to the locality, and has sites ranging from beach bars to rodeo-themed venues.

Ultimate's business model seeks to buy the freehold to its sites, rather than leasing them, which can be a crippling burden if trading takes a turn for the worse. It also gives the share price a solid asset backing. Ultimate was insisting yesterday that it will not compromise its criteria for new openings, namely that they be freehold sites in prime positions on town "drinking circuits".

The stock has traded sideways since we said hold in January and, at 328.5p, it is still worth hanging on.

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