The Investment Column: HBOS's return on assets is rising, as others fall

Hunting; Victory Corp
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The Independent Online

Our view: Buy

Share price: 938.5p (-14.5p)

Even Howard, the cheesy bank manager from HBOS's television adverts, would be hard pressed to find anything new to sing about in yesterday's update from his employer on trading in the first half of this year.

Like those banks updating before it, HBOS reassured investors that business is ticking along nicely and declared itself "comfortable" with forecasts for profits before tax for the year of £5.2bn, up from £4.8bn in 2005.

The H in HBOS is Halifax, the country's biggest mortgage lender (the BOS is Bank of Scotland). Its share of net home loans is running at 17 per cent, not markedly better or worse than in the first six months of last year.

Bad debts are as expected too, with City experts pencilling in a full-year impairment charge of £1.9bn, £300m more than in 2005.

An absence of any positive surprises left HBOS shares lower yesterday.

Trading at 9.1 times projected 2007 earnings, they are neither the cheapest nor the most expensive in the UK banking sector. HBOS's return on assets may still be lower than the other big banks, but it is climbing while the others are falling.

For a long time now, HBOS has been seen as the chippy little brother to the Big Four high street banks, punching well above its weight and mounting a muscular challenge in current accounts and lending to businesses.

But there are already those in the City who have started to question where growth will be found in future. Despite insistences from Andy Hornby, who takes the helm in August, that no overseas adventures are on his horizon, there are those who say that within a couple of years he will have no choice but to buy abroad for growth.

Shareholders looking for a company with financial strength and a management with a proven track record of making the right calls need look no further. Buy.


Our view: Buy

Share price: 395p (+32p)

Hunting has been in the energy services business for more than a hundred years. It started life in 1874, under the stewardship of Samuel Hunt, first focusing on shipping but quickly moving into aviation, defence and the energy sector. In 2000 the group decided to move its attention solely to oil and gas services - to making components used in drilling for the black stuff and transporting it and storing it ahead of use by refineries.

As yesterday's trading statement from Hunting shows, that decision was a very good one. In it the group boasted that it is trading ahead of expectations. Before the news, analysts expected a profit of £44m for 2006. Now they forecast this figure to come in closer to £48m.

Business is booming at the company thanks to the strong price of crude. Oil majors are spending more on drilling and exploration than they have ever done before and Hunting does not expect this state of affairs to change any time soon. The price of crude rose 40 per cent in 2004, 40 per cent in 2005 and has already jumped by around 10 per cent so far this year as oil companies struggle to keep up with record demand from fast industrialising countries such as China and India, while replacing their fast depleting reserves at the same time.

Hunting shares trade at 15 times forecast earnings for 2006. Its rivals in the oil services sector, on average, trade at 23 times. This discount is unjustified. Buy.

Victory Corp

Our view: Avoid

Share price: 102.5p (+1.5p)

There was more embarrassment for Richard Branson yesterday after Victory Corporation, the cosmetics business the tycoon controls via Virgin group, unveiled another set of dire results. The group reported a loss of £2.3m compared with a profit of £1.2m last year.

There was a small bright spot. Sales rose 7 per cent to £76m thanks to the launch of a jewellery business last year. Coupled with Virgin Cosmetics the unit accounts for over 85 per cent of Victory's operations.

Such has been the success of jewellery sales that the group is considering the launch of a third lifestyle product range to be sold through its door-to-door network from the spring of next year. Victory sell products through a national network of agents who organise testing parties in much the same manner as Tupperware was once sold.

At the end of March, the company had 11,500 active "consultants" who held more than 273,000 parties.

Seymour Pierce, the group's broker, expects to see Victory post a profit of £500,000 in the current year. Should its third range of products prove to be a success it suggested that this forecast could prove conservative.

However, if the company's history is anything to go by it is unlikely to outperform.

In the meantime, its shares trade at 23 times forward earnings, a sizeable premium to other retailers, and do not pay a dividend. The stock is best avoided.