Investment Column: Emap must prove itself in France

Kensington may be hit by higher borrowing costs; Floors stores to benefit from changing fashions
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The Independent Online

Emap, the media group, put out what it must have hoped would be a neutral trading update. A few months into the financial year, the company assured the market that it would meet full-year forecasts.

However, it appears that the City was looking for something more positive, after the company shocked investors in May with the news that it was having problems in its important French market. Emap shares closed down 4.5p at 718.5p.

In France, Emap has seen its French television listings publications hit by new competitor titles. Some 10 per cent of Emap group revenues come from its two television weeklies in France - Télé Star and Télé Poche. In January this year, Bertelsmann, the German media giant, launched a fortnightly title, Télé 2 Semaines, with a cover price of €1 - roughly the same as consumers pay for the Emap weeklies. More recently, Bertelsmann has launched a second fortnightly. The two Bertelsmann magazines have captured a significant proportion of the sector, with circulations for Télé Star and Télé Poche falling substantially.

Yesterday Emap said there had been "no change in the competitive landscape" in France, particularly in television listings. It added that the wider advertising market "has weakened" in the country. Emap has many magazine titles in France. Goldman Sachs, the broker, noted that Emap's French rival, Lagardère had said this week that the market was improving.

Emap said the slow trading seen in its radio division, which includes the Kiss FM brand, had continued, though there had been a "modest pick up" in July. Prior to July, the company was up against some tough comparative figures from last year.

The business-to-business division is doing well. The UK consumer magazines business remains "robust" with advertising performing well.

Emap shares are well down from levels when this column twice recommended investors to sell the stock. Even at the current shareprice, Emap does not look tempting until it can show progress in France.

Kensington may be hit by higher borrowing costs

Kensington is the respectable face of lending to people with poor credit histories. Mortgage customers can only borrow 77 per cent of the value of a property - compared to more than 100 per cent elsewhere in the market - and average loans are 2.5 times the amount of money someone earns, which is again more conservative.

Kensington has grown strongly since its flotation four years ago. Its shares have almost doubled, closing at 425.5p yesterday, and it controls about 15 per cent of the lucrative £10bn "sub prime" lending market.

Kensington said yesterday pre-tax profits had risen by 46 per cent to £23m in the six months to 31 May and - carrying on a tradition of generous pay-outs to shareholders - the interim dividend rose 67 per cent to 5p.

There seems to be strong demand for Kensington's products, despite widespread fears that mortgages are set to get more expensive as interest rates rise in the UK. Kensington's pipeline of new business was worth £420m in June - a record for the company.

Yet the company is inevitably sailing into more choppy waters, in which widely expected increases in the cost of borrowing will raise the number of customers falling behind on their repayments. Kensington has so far kept a lid on this trend, with losses suffered on loans that have turned sour remaining at less than 0.1 per cent of advances.

But it is these concerns - plus a general caution in the market about specialist lenders - which have kept Kensington's shares down to a far lower multiple than its banking rivals.

Given that the market is set to become tougher, Kensington's shares do not look like a sensible refuge. Avoid.

Floors stores to benefit from changing fashions

The Changing Rooms phenomenon has made carpets deeply uncool, and had Britons ripping up their shag piles in favour of wooden, laminated and tiled flooring.

Roll out Floors 2 Go, the flooring retailer that listed on AIM in April. It said yesterday that like-for-like sales were up 28 per cent over the past six months. Including stores opened last year, sales were up 224 per cent. Estimates put the growth of the flooring market at 10 to 13 per cent a year and suggest it could be worth around £400m. There is potential for Floors, then, as one of the only specialist retailers of any size in this area, to capture an expanding market.

With only 100 stores so far, there is a lot of ground to cover before Floors gets full national exposure. Yesterday's news that it is to open 16 stores in Scotland shows it is making plans. Some investors might feel nervous that Floors could be exposed to a housing market crash and a consumer spending slowdown, but it could also be argued that homeowners will spend more money on improving their existing properties if the housing market slows.

The shares floated at 48p and are now at 68p. On 2004 estimates, it does look expensive at 23 times earnings.

Looking to next year, when its expansion will start to boost the bottom line, it drops to a more reasonable 16 times. Worth a long-term buy.

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