The Investment Column: Avoid B&B's exposure to buy-to-let

Buy Wimpey as it profits from foreign labour - Morgan Crucible starts to make sense for investors
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The Independent Online

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 the trends in specialist lending.

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 the trends in specialist lending.

Its chief executive Steven Crawshaw, who took over last March, abandoned the strategy of his predecessor and sold the bank's estate agency business and the loss-making mortgage broker Charcol, and axed 600 jobs. He defends the focus on buy-to-let lending, where B&B is the No 1 player with a quarter of the market, by predicting confidently that it will keep growing at a faster rate than the rest of the mortgage market.

But the signs are that volumes are already slowing and margins narrowing. The Council of Mortgage Lenders said last week that while the buy-to-let sector continued to grow strongly in the second half of last year, growth slowed and will ease further this year. Buy-to-let investors are largely holding on to existing portfolios, but making fewer acquisitions, and with interest rates higher now and rental income still depressed, the prospect of lower capital gains may deter new wannabe landlords.

There was concern in the City yesterday that the group's mortgage arrears have jumped and will keep rising this year - although they have risen from "abnormally low levels" and are below the industry average.

The company unveiled annual pre-tax profits ahead of expectations yesterday - up 6 per cent to £280.2m. Bad debt provisions came down by £2m.

The group is seen as a takeover candidate - with speculation focusing on Barclays as the most likely bidder - though there is no reason why a predator would act quickly.

The jury is still out as to the extent of the slowdown in the buy-to-let market. While the Bradford & Bingley management is prepared for a slowdown from the "super-growth" seen last year, it is hard to share their confidence. The stock is 14 per cent higher than when we said avoid a few months back, but our view is unchanged.

Buy Wimpey as it profits from foreign labour

Immigration from the European Union and further east has eased the skills shortage that has bedevilled the building industry for years. Yesterday George Wimpey lauded the arrival of skilled labourers, which has driven down wage inflation and helped the housebuilder in its successful drive to push down the costs of building a house. Together with rising selling prices, the improvements led to a 19 per cent rise in profits in 2004.

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. 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 6 suggests Wimpey shares are priced for armageddon. But armageddon is not likely. Buy.

Morgan Crucible starts to make sense for investors

Warren Knowlton has struggled to make sense of Morgan Crucible over the two years since he was appointed chief executive. The company, loosely a "materials" business, groups its operations into ceramics, magnetics and carbons, but the products that it makes from these materials are so diverse that it has been difficult to get a handle on the industrial and economic forces buffeting the company.

He is on his way to making it all make sense, however, and has made progress integrating all the acquisitions that his predecessors left largely untouched. Best of all, by disposing of a lot of dead-wood businesses, he appears to be focusing the group as promised on high-margin, hi-tech products with growth potential. The slimmed-down group has only three-quarters of the turnover that it had before Mr Knowlton's arrival, but what is left grew at 7 per cent in the year to 4 January.

There is more restructuring to do, but with trading continuing to be robust in North America and in Asia (in contrast with Europe), and with a joint venture giving inroads into China's industrial heartland, the stage is set for a return to profit, and perhaps even a return to the dividend list later this year. Morgan Crucible managed positive cash flows last year for the first time in half a decade at least, and its shares jumped 7p to 187p on the news yesterday. We said buy at 132p. Keep buying.

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