The Investment Column: Hanson is built on solid foundations

Competition rule change puts Vardy in the fast lane
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The Independent Online

The tributes to Lord Hanson, who died last month, recalled the drama of his time building the Hanson Trust in the Eighties, when it went from hostile bid to hostile bid and constructed a corporate monster

The tributes to Lord Hanson, who died last month, recalled the drama of his time building the Hanson Trust in the Eighties, when it went from hostile bid to hostile bid and constructed a corporate monster. They also recalled the suddenly changed fashions of the Nineties, when bloated conglomerates slimmed down their focus to specific industries and deliberately unsexy strategies. Look at what remains of his company: Hanson must be the least sexy business in the FTSE 100.

Hanson, now a building materials supplier, is the world's largest producer of crushed rock, sand and gravel. Its products are basic, it says apologetically, but essential.

Yet with £3bn of sales a year, and underlying profits of more than £300m, it is an investment opportunity to be taken seriously. Notwithstanding the ebb and flow of the economies in which it operates - North America mainly, plus the UK and Australia - it is the leader in a vital industry whose operations generate vast amounts of cash.

A trading update yesterday showed things still in equilibrium despite some tough markets. Many had expected a profits warning but Hanson was able to say it has been passing on to its customers most of the rising costs of fuel, bitumen and steel. The increases its customers would resist, it has absorbed through a cost savings programme of its own.

A negative was the higher-than-expected cost of asbestosis litigation payouts, an issue that will continue to dog the group and justifies keeping its shares on a valuation of less than 10 times earnings. Longer term, the strategy of bolt-on acquisitions will guarantee earnings growth above economic growth.

Exactly 12 months ago, we predicted that the coming year would be dull for Hanson and that the stock was mainly attractive for its dividend yield, then almost 5 per cent. We could write almost the same thing now, although the modest share price rise (from 390p then to 425p now) has reduced the prospective yield nearer to 4.5 per cent. That's pretty good and the solidity of the Hanson business - and the strength of its management's track record - ought to allow investors to sleep nights.

Competition rule change puts Vardy in the fast lane

Slowing UK car sales might be enough to put most people off the idea of investing in a new and second-hand motor dealer this Christmas.

But recent changes in the car sector's competition rules are proving to be a strong driver of growth for the larger dealers, such as Reg Vardy, making their shares an increasingly compelling proposition for the private investor.

As the sector's exemption from EU competition rules was finally scrapped last year, an abundance of acquisition opportunities for companies with cash to spare, such as Vardy, were created.

Under the old rules, car manufacturers had all the power, putting limits on how many dealerships a company could own, and dictating where they could operate.

But with these draconian laws finally consigned to the pits, dealers were suddenly empowered, and now they are free to buy as many dealerships as they can afford.

Over the past 15 months, Vardy has been busy doing just that, snapping up 28 smaller rivals. Although many of these are still loss making, once they have been bedded down and integrated into the Vardy system, they look to set to make a substantial and increasing contribution to group profits. Meanwhile, Vardy continues on its shopping spree.

While yesterday's interim results saw a small reduction in group profits, prospects still look strong for Vardy. With a yield of more than 3.5 per cent, and a market value of just 8.3 times this year's earnings (the lowest in the sector), Vardy is definitely one for this year's Christmas stocking. Buy.

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