The Investment Column: Homestyle's pain is necessary - and unlikely to be over

Our view: Avoid

Share price: 116p (-2p)

The City was expecting Homestyle to break even this year. When the furniture retailer yesterday posted a pre-tax loss of £9.1m, analysts in the Square Mile could be forgiven for wanting to know why the group had not put out a profit warning some time ago.

The answer from Homestyle's management is that they only realised the retailer would fail to live up to expectations when the results were finalised a couple of weeks ago. In fact, given the state Homestyle was in just a year ago, management believe they have done rather well.

Last summer, Steinhoff International underwrote a £100m fund raising at the group which pretty much saved it from collapse. In return, the South African furniture maker ended up with a 61 per cent of Homestyle. The bulk of the money (£87m) was spent on paying off the retailer's debt and settling a VAT liability.

Homestyle runs 170 Harveys furniture stores in the UK and a further 392 bed shops spread across the Bensons, Sleepmaster and Bed Shed formats. Since Steinhoff took over, there has been a major reorganisation of the group's stores. Ninety two poor performing outlets have been closed and new ones opened. Along with all this activity at the front end of the business, Homestyle's supply chain has also had to be overhauled.

Given the magnitude of the restructuring, it is little wonder the group lost so much money and that it will not be paying a dividend this year. The reforms helped boost Harveys. Like-for-like order growth at the unit rose by 15.5 per cent in the 52 weeks to 1st July.

Strangely, Homestyle failed to say how the beds division did on a like-for-like basis and there was also no update on current trading across the group either. However, it did hint at having suffered from a tough retail environment in July because of the hot weather and the World Cup. With this in mind and with Homestyle trading at a whopping 30 times forward earnings, investors would do well to steer well clear of the stock.

Molins

Our view: Avoid

Share price: 99p (-13p)

Molins will stop producing tobacco machinery in the UK from next spring with the loss of 80 jobs. Over the past five years the group has been slowly moving its operations to Eastern Europe and yesterday came news that its remaining production in this country (at a plant near High Wycombe) will soon be transferred to the Czech Republic.

The move makes good sense. Molins' tobacco machine making operations have clearly been in need of reform for a while and the relocation is expected to save the company up to £2m per year. Interim results from the group yesterday showed the division suffer a 15 per cent drop in orders which pushed it into the red.

This side of Molins' business has been in decline for many years. Back in the 1970s, the group was a world leader, but in the years that followed it failed to keep up with more innovative rivals in German and Italy. As a result, it is now number three in this industry and finds that the bulk of the business it gets is servicing machines it installed during its heyday.

Although the unit's profitability should improve during the second half of the year, overall earnings are likely to be lower than those seen in 2005.

There was slightly better news from Molins' packaging and scientific services division. They account for around two-thirds of total group revenues. Profits from making packaging machinery rose to £300,000 from £200,000, while, at its scientific services business, which makes analytical equipment for the tobacco industry, profits jumped from £1.4m to £1.2m.

For the six months to the end of June, Molins registered an overall profit before tax of £1.4m from continuing operations, compared with £800,000 in the previous year. Underlying earnings per shares (EPS) came in at 4.6p. By the end of the year, analysts expect EPS to have reached around 18p. Although this leaves Molins trading at just 5.5 times forward earnings, the group looks vulnerable to more earnings disappointments at its tobacco machinery division.

Clarkson

Our view: Buy

Our view: 1,020p (-38.5p)

Clarkson, the world's biggest shipping shipbroker, posted a 30 per cent drop in first half pre-tax profits to £9.3m yesterday. The figures reflected a period of turmoil for shipping rates and some one-off costs suffered by the group. The downturn had been well flagged by Clarkson, so its shares suffered only a small drop.

In fact, management said that trading in the first half had not been as difficult as expected and they were optimistic about the second half of the year. Charter markets have improved in recent months and, to show its confidence in the future, Clarkson's board raised the company's interim dividend by 20 per cent to 12p. At 12 times forward earnings, the stock is a buy.