The Investment Column: Carpetright can still roll out growth

BBA; Dobbies Garden Centres
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The Independent Online

Our view: Buy

Share price: 1,235p (+5p)

Is it time to pull out the rug from under Carpetright? Lord Harris of Peckham, the group's chairman, chief executive and biggest shareholder, himself admits that the year just ended was "difficult".

The slower housing market meant it took massive promotions to persuade anyone to re-carpet, which hit margins in the first half and ultimately, profits.

Bit by bit, the UK is approaching Carpetright saturation. True, the group is tinkering around with its store format, taking smaller outlets into secondary towns and looking for cheaper space away from top-notch retail parks. But the fact remains that with a 28 per cent share of the UK market, and 475 stores of the 550 it has set its sights on opening, the group will struggle to pile on the growth in its core market.

Full-year results yesterday showed pre-tax profits excluding exceptional items fell 9 per cent to £55.1m, reflecting the impact of that early hit to its profit margins. Like-for-like sales fell 2.8 per cent last year, despite picking up in the second half. This column was cautious on Carpetright during last year's downturn - and rightly so. But this column knows that time does not stand still, least of all in retailing, and yesterday's statement made better reading if you scratched below the surface.

Cash flow remained strong, the dividend was increased and the group's push into Europe began to bear fruit.

Lord Harris, an industry veteran, is itching to be a big deal elsewhere in the Continent and so far has opened up shop in the Netherlands and Poland. Longer-term growth is mapped out in potentially the Czech Republic and Hungary, which will make up for the UK when the group's estate hits 550.

With the housing market heating up once more, the outlook for Carpetright is picking up. The shares, as ever, are expensive on around 20 times forward earnings. But that does not make them any less attractive. Buy on any weakness.


Our view: Avoid

Share price: 254.5p (+7.25p)

Investors were yesterday happy to see that BBA's planned de-merger of its Fiberweb division is still on track to be completed in the fourth quarter. The company has already disappointed the City once this year by delaying it following a downturn in trading at the unit.

Fiberweb, which produces non-woven fabrics such as those used to make nappies and hospital blankets, has been negatively impacted by high energy and raw material costs and weak volumes in North America. It is now being restructured. Yesterday's trading statement from BBA said that Fiberweb, which accounts for a quarter of group profits, continues to struggle although an improvement during the second half of the year is likely.

BBA's decision to hive off the business by giving it a separate London listing certainly makes a lot of sense. Fiberweb is totally unconnected to the aviation services operation which makes up the rump of BBA. Among a multitude of activities it is involved in refuelling and cargo handling and is enjoying buoyant trading conditions. Analysts believe that as a standalone entity it could one day attract a bidder.

For the time being, the big issue facing BBA shareholders is the future of its dividend. The stock offers a yield of 5 per cent but this is covered only 1.2 times and could well end up being cut following the demerger. The fact that a new chief executive is expected soon at BBA only raises the chances of a dividend reduction. Until this uncertainly passes the stock is best avoided.

Dobbies Garden Centres

Our view: Hold

Share price: 820p (-2.5p)

Garden centre business are all the rage these days. The sector has been set alight by the takeover of Wyevale Garden Centres by the tycoon Sir Tom Hunter in April.

When Sir Tom's West Coast Capital investment vehicle appeared on the shareholder register of rival Dobbies Garden Centres with a 3.7 per cent stake earlier this month, few were surprised to see its stock soar to an all-time high. Yesterday, the Scottish-based group posted a 3.6 per cent rise in first half profits to £1.8m and said an improvement in the weather had resulted in a 6.4 per cent jump in like-for-like sales for the seven weeks since 30 April.

Dobbies is forecast to notch up a profit of £5.3m by the end of the year. However, this is of secondary importance to its shareholders at present. Of most interest is what Sir Tom plans to do with his stake.

Most expect him to table a bid for the group soon at a price some way above yesterday's 820p close. At this level Dobbies is valued at just £82m while its freehold properties alone are estimated to be worth £90m. Seymour Pierce, the stockbroker, believes Sir Tom could end up paying as much as 1,200p for the company. Although its shares are up 50 per cent since the start of the year they are worth holding on to.