The Investment Column: Bellway set to build on solid ground

Clinton Cards; Trinity Mirror
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The Independent Online

Our view: Buy

Share price: 1,344p (-22p)

Bellway, the UK's fifth biggest house builder, yesterday confirmed that it is interested in acquiring Linden Homes, a much smaller private peer owned by its staff and HBOS. The south of England-focused group is expected to fetch around £300m, and Bellway has signed a confidentiality agreement.

Of course, there is no guarantee that a deal will be done. In fact, Bellway's management team were yesterday keen to stress that it looks at pretty much every asset up for sale in the sector, and that talks with Linden are at a very early stage. The news followed a solid set of annual results from Bellway. It delivered a 3 per cent rise in pre-tax profits to a record £221m, on the back of a 5 per cent jump in sales to £1.2bn.

The group said it was particularly pleased to have held on to its 19 per cent profit margin, given the incentives housebuilders have to give to customers these days in order to secure a sale. This time last year Bellway had to offer cash discounts, part-exchange deals and free carpets and curtains to buyers. Market conditions have improved somewhat since then, with business going particularly well in the North-east, Scotland and the Thames Gateway.

Bellway finished the year with a £647m order book. Its land bank, viewed by analysts as one of the best in the business, should help the company to outpace rivals in the year ahead. As far as the UK housing market goes, Bellway management said that August's interest rate rise had no impact on sales. They expect another rate rise next month, but suggested that it is unlikely to have a significant impact on the market.

Trading at a discount to peers, Bellway shares are worth buying.

Clinton Cards

Our view: Hold

Share price: 67.75p (+1.25p)

Those betting on the Lewin Family taking Clinton Cards private will be disappointed. Clinton Lewin, managing director of the gift shop chain, yesterday ruled out such a move anytime soon. His family own 30 per cent of the company.

However, there was some good news for shareholders in Clintons. Trading seems to be picking up. In the 10 weeks to 8 October, like-for-like sales rose 1.8 per cent across the group. The Clintons chain enjoyed a 1.2 per cent increase, while sales at Birthdays soared 4.1 per cent.

But life was not always so good at Birthdays. This time last year Mr Lewin was almost certainly regretting the purchase of the chain. Its performance was faltering, while the acquisition had taken debt at the company to over £100m. In fact, some in the City were worried that Clintons might breach its banking covenants. After much restructuring - poorly performing stores were closed, the estate was refitted and a new till system was installed - Birthdays seems to be in recovery mode.

Although the group registered a full-year loss of £6.1m yesterday, a figure slightly bigger than analysts' expectations, Mr Lewin says the retailer is now well-placed for the all-important Christmas trading period. He expects Birthdays to become profitable some time in 2007, helping the whole group to deliver a pre-tax profit of some £10m by the end of the year.

At £90m, Clintons' debt burden remains high, but any worry that the company will struggle to service it has gone. The amount of cash the business generates covers its interest payments nearly five times.

Clearly a recovery is on the way at the retailer, but at 19 times forward earnings this seems already reflected by its share price.

Trinity Mirror

Our view: Avoid

Share price: 488p (-8.25p)

Investors should steer clear of the newspaper group Trinity Mirror. That was the message from Deutsche Bank to its clients yesterday. Why? Quite simply because trading conditions are dire in the UK newspaper arena.

The problems facing the industry are cyclical at present, says the broker. Although the UK economy has been strong for the past 18 months, advertising markets are in a dreadfully weak state. Further down the line, it expects the newspaper industry to be hit by structural changes, namely an even more rapid decline in circulation and the loss of advertising to the internet.

Deutsche believes the main hope for Trinity shareholders is a takeover of part or the whole of the business. However, recent news of the group's strategic review seems to have generated little noise from private equity firms. Judging by the value of the offers for Daily Mail & General's Northcliffe regional newspapers arm earlier this year, this state of affairs is unlikely to improve. Deutsche suggests there is now only a 20 per cent chance of a break-up bid for Trinity.