The Investment Column: B&B looks risky and expensive

Versatile Findel just keeps getting better - Drilling down, Cairn Energy still has upside
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The Independent Online

Bradford & Bingley, Britain's biggest buy-to-let lender, is in the middle of a dramatic shake-up: it is selling its non-core assets to focus on niche mortgage lending and the sale of simple financial products. The bank is also in the process of cutting 600 jobs as part of its drive to slash costs and strengthen its position amid the intense competition among the high street banks.

Bradford & Bingley, Britain's biggest buy-to-let lender, is in the middle of a dramatic shake-up: it is selling its non-core assets to focus on niche mortgage lending and the sale of simple financial products. The bank is also in the process of cutting 600 jobs as part of its drive to slash costs and strengthen its position amid the intense competition among the high street banks.

On Friday, the former building society announced the sale of its estate agent and surveying businesses to Countrywide. Four out of five planned disposals are now complete, leaving only the independent financial advice business, Charcol, on the block. While B&B said yesterday it is still on track to sell Charcol by the end of the year, some analysts thought it would have trouble finding a buyer for the loss-making business.

But investors are mainly concerned that B&B is a high-risk organisation whose focus on lending to landlords and self-certified borrowers, who vouch for their own income, leaves the bank particularly exposed to the slowdown in the housing market. Buy-to-let, which has propped up the housing market until now, is likely to slow more sharply than the rest of the market. With borrowing costs up by one-third from last November, inexperienced landlords could become stretched. B&B's traditional mortgage book accounts for 17 per cent of the lender's balances, down from 72 per cent in 2000 when it became a bank. One-quarter of the mortgages that B&B sells are buy-to-let now.

The City is also concerned that the bank's capital generation is not strong enough to support growth going forward. Some investors are still hoping that B&B will be taken over, with speculation centring on Barclays bank as the most likely bidder, but it is hard to see why other players would want to take on a specialist mortgage lender just as the buy-to-let market is turning down.

Trading at about 10 times earnings, B&B shares, at 289.75p, seem too highly rated in comparison with its buy-to-let rival Paragon, which is trading at about seven times earnings. Avoid.

Versatile Findel just keeps getting better

Findel has done a fine job of transforming itself from a company selling Christmas cards into one selling, well, just about everything.

These days, the former Fine Art Developments group has a veritable library of catalogues touting goodies such as garden furniture, soft furnishings and DVD players. It also has a booming education division which supplies schools with the likes of Bunsen burners and hockey nets.

The group's focus on those customers at the lower end of the socio-economic spectrum might mean that it lacks status outside the shrinking mail-order world. But it has been a consistent stock market performer, amply rewarding this column's faith last December. Its shares rose a further 11.5p to 420p yesterday after Findel issued another promising trading update.

Group sales increased 14 per cent in its first half, putting it on track to hit City forecasts of about £47.5m pre-tax profits for the full year.

Sales at its home shopping division jumped 16 per cent, although this stellar rate is likely to moderate. More frequent catalogues selling more products at keen prices drove the increase. Meanwhile schools have responded well to its decision to push more basic products, such as exercise books. Its educational supplies arm grew sales by 18 per cent, or 6 per cent on an underlying basis.

Keep buying.

Drilling down, Cairn Energy still has upside

Cairn Energy has been one of the most spectacular stock-market stories of this year, after the oil exploration and production group made a huge discovery in Rajasthan, India.

Yesterday the story moved on another chapter: the government of India has given the company the go-ahead to move from exploration to development on a large part of the acreage it holds exploration licences for - it now has about 40 per cent of the area until 2020. This development zone is the equivalent size of 12 North Sea blocks. Exploration goes on in the rest of Cairn's licence area.

The official green light includes the core Mangala field - which should produce 100,000 barrels of crude oil per day in itself. The company will now need to submit a development plan. Production should start in late 2007.

It will cost some $500m (£280m) to develop the area. The Indian state oil company should come in for 30 per cent and Cairn says it has the funds to meet the rest of this expenditure requirement. Whether or not Cairn eventually brings in more partners, this is unlikely to happen in the short term as it would be difficult to price the potential of the entire exploration area.

That potential is for 1 billion barrels of recoverable oil. Not all of that is in the price, even at 1,499p, so investors should hold on.

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