Investment Column: Storm clouds hanging over Abbey

Keep Wolseley on hold despite recent growth; It's still worth nibbling at Inter Link Foods
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The Independent Online

There have been so many clouds hanging over Abbey National, Britain's sixth largest bank, that the evaporation of one yesterday - the question of the solvency of its life insurance businesses - does not guarantee a sunny future.

There have been so many clouds hanging over Abbey National, Britain's sixth largest bank, that the evaporation of one yesterday - the question of the solvency of its life insurance businesses - does not guarantee a sunny future.

Rising interest rates, the poor competitive position of Abbey's mortgages and other products, and concern over the sustainability of the dividend - all are storms threatening.

We are 17 months into the three-year recovery plan set out by Abbey's chief executive, Luqman Arnold, and there are still few tangible signs that he can turn this business round. The extrication of the business from its disastrous foray into wholesale banking has been handled well, but it turns out to have been the least of the challenges.

Increasing competition in the mortgage and personal lending markets is squeezing its margins, seemingly offsetting any savings that Abbey is making from its business review. Meanwhile, creeping interest rates are eroding the difference between the price at which Abbey borrows money and at which it lends it out to homebuyers.

At its first-quarter results in April, the bank warned profits would miss expectations. Since then, rates have risen again twice, with more expected to follow over the next year.

While takeover rumours have sent the shares up more than 18 per cent since its April lows of 414p, the company now looks absurdly over-valued, trading at around 13 times next year's likely earnings, compared with an average of little more than 9 times amongst its more stable, better-positioned peers.

A takeover remains a viable possibility for the group, and Santander of Spain has certainly held talks. But the Competition Commission's decision to disallow a Lloyds TSB bid three years ago leaves Abbey off limits to the most obvious bidders, its UK competitors who could afford to pay more. At 490p a share, the numbers simply don't stack up for a foreign company that won't benefit from the cost-savings of a merger. Sell.

Keep Wolseley on hold despite recent growth

Shares in Wolseley, the FTSE 100 plumbing and building materials distributor, shot 5 per cent higher to a record 875p yesterday. Investors knew the company was trading well, but didn't suspect it was trading this well: sales in the past 11 months have risen 20 per cent, stripping out currency effects, and profits have gone up 30 per cent.

Wolseley is one of the UK's great success stories, expanding across the globe to build a network of businesses supplying customers ranging from Boeing and General Electric down to the lowliest local plumber. The diverse nature of the company's products, from pipes to timber, and of the areas it supplies, from house repairs to giant factory projects, mean it can survive a mild economic downturn with barely a wobble. Although the weak dollar has trimmed earnings, analysts are still predicting sterling pre-tax profits of £535m this year, compared with £456m last time.

Profit growth has been generated from the benefits of scale which mean it can squeeze better deals from its suppliers, while the company has been piling its formidable cashflows into acquisitions. There is plenty of scope to grow still: in the US plumbing supplies business, Wolseley is number one, but has just 6 per cent market share.

The one caution is that yesterday's talk was of "two year's growth in one", suggesting that the benefits of rising raw materials costs and product shortages will not be repeated in 2005. The implementations of new central systems might also cost extra. Given this, the shares are a prudent hold rather than a buy at present.

It's still worth nibbling at Inter Link Foods

The good bakers of Inter Link Foods, the Blackburn-based cakes company, have seen the share price rise like the best sponge. Up by more than 50 per cent in 18 months, the stock was a further 10p better at 462.5p yesterday after its fifth successive year of record turnover, profits and earnings per share.

The results answered several key questions. What is the progress of recent acquisitions including that of Soreen malt loaves? (Profits at Soreen rose on its first full-year within the group.) And what are the prospects for the current year? (Like-for-like sales are up 16 per cent in the first eight weeks.) But not, who ate all the pies? (Some 36 million Hoppers mince pies were sold over Christmas 2003.)

Despite significant increases in raw materials prices, the increased volume of production and improved buying have meant margins actually improved. Pre-tax profit in the year to 7 May was £3.9m. With the licence to bake Disney cakes and snacks being extended into new products and characters, there are further gains to come. Inter Link's broker, Brewin Dolphin, raised its forecasts for the current year, despite the obvious risk of supermarket's squeezing their suppliers. We said buy the shares 18 months ago, and think they are still worth snacking on.

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