The Investment Column: Consumer downturn continues to weigh on ailing Carpetright

Now is a good time to take profits in underperfoming Westbury; Braemar staying afloat in choppy waters
Click to follow

So while yesterday's trading update showed sales falling at broadly the rate everyone had feared, Carpetright's margins were lower. Like-for-like sales (which exclude stores opened or closed in the past 12 months) were down 6.7 per cent across Carpetright's 417 outlets across the UK over the past 25 weeks. Analysts reckoned the gross margin had slipped by a half a percentage point, and slashed profits forecasts for the financial year from about £60m to £55m.

The unfortunate price-discount strategy has been in effect reversed, but what has hardly changed since we last looked at Carpetright in the spring is the outlook for consumer spending. This is fragile. With tax rises likely and receding hope of an interest rate cut to offset high fuel prices, it is impossible to be cheery about the retail sector for the time being.

Lord Harris of Peckham - Carpetright's chairman, chief executive and 23 per cent shareholder - is sometimes cited as wanting to take the company private, although with little in the way of asset backing, this seems a marginal deal for private equity. The 5 per cent-plus dividend yield on the shares should act as a brake on their decline, but dividend-growth expectations are already being scaled back.

There is no sign that the company is under any financial strain, and it could even benefit if weaker rivals go to the wall during the downturn. European expansion adds a further positive narrative, but the 93 stores on the Continent are only marginally important to profit and it will be a while before the first two stores in Poland, opening in the next six months, will be contributing at all.

The shares sit at the same level as in April, when we said avoid. That remains our advice.

Now is a good time to take profits in underperfoming Westbury

Westbury is up there in contention for the title of worst quoted housebuilder. On financial measures such as return on capital and margins, it performs poorly. It has reported a 26 per cent fall in interim profits at a time when rivals are hitting record numbers. It has missed its targets for the number of building sites being opened and for the number of homes being sold. It has among the highest debt levels in the sector, making it particularly risky relative to its peers. And, despite all this, its shares are among the most highly valued in the industry.

Perhaps not despite, but because of all this. As a mid-sized builder producing a little more than 4,000 homes a year, it looks ripe for a takeover by a bigger company with a management that could run it better.

Six months ago, we advised existing shareholders to hang on, not just for this possibility but also because we suspect that the rest of the sector is undervalued, rather than that Westbury is overvalued. Its shares are flat over the six months, despite the profits warning, and now is a good time to take the profits investors have enjoyed over recent years.

Westbury is sticking by its ambitious target of boosting annual production to 7,000 homes by the end of the decade, but its disappointments this year - blamed on planning delays - have raised suspicions that it has made some poor purchases of land for development. It will increasingly have to rely on social housing projects to pump up the volume. On 7.5 times earnings, and with these earnings likely to decline, there is much better value elsewhere in the sector. Sell.

Braemar staying afloat in choppy waters

Braemar Seascope is a shipping broker, responsible for arranging cargo and container ships for customers who need to haul raw materials and manufactured goods around the world. China is sucking in raw materials for its industrial revolution, and exporting the consumer and industrial goods that are increasingly manufactured there - so Braemar has been busy.

The company operates out of four main offices, in London, Aberdeen, Beijing and Shanghai, and now has interests in India and Australia. It is, literally, well-placed to benefit from the steady growth in world trade. Yesterday, it reported a 75 per cent increase in turnover and 62 per cent rise in pre-tax profits for the six months to 31 August. The cash flows of this company have been strong enough for it to begin contemplating acquisitions or office openings in the Middle East or Singapore.

The cost of chartering ships is proving volatile, however, and therefore so is the value of the cut taken by brokers such as Braemar. Between the start of Braemar's first half and the summer, the cost of dry cargo ship charter had halved. Braemar's shares have obviously bobbed up and down in these choppy waters, but at least rates have started to recover, in part because of the demand and the disruption caused by the hurricane season.

That should not deter the long-term investor, who should look to the expansion plans on Braemar's horizon, and take comfort from the 5 per cent dividend yield if they feel seasick on the journey. Buy.