The Investment Column: Modestly-priced Halfords still firmly on the road to growth

Business Post; S&U
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The Independent Online

Our view: Buy

Share price: 335p (-3.25p)

Halfords has stepped on the gas since it was floated two years ago by Rob Templeman, the man who now runs Debenhams. The car spare-parts specialist has realised that just selling replacement wiper blades did not make for the most interesting retail proposition.

So, to broaden its appeal, the group that has had more owners than your average second-hand banger has made a big push into more exciting markets such as cycling and electronic car gadgets. It has been a sensible strategy because it has taken Halfords into hot shopping categories such as satellite-navigation kits and in-car iPod devices.

These days the retailer gets one-third of its revenues from its bikes business, one-third from what it dubs "car enhancement" and the rest from its core car maintenance products. That explains how it managed to deliver a 6.5 per cent uplift in like-for-like interim sales at a time when most other retailers were lucky to lift their top line at all.

Ian McCloud, the chief executive, says sales increased in all of its key categories, even in the staid world of those replacement blades. A change to the law on driving children around, requiring parents to shell out on booster seats, gave the sales an extra lift in the last few weeks of its half year.

That's the good news. The downside is that products like satellite navigation are very low margin, which means the more kits Halfords sells, the bigger the dent in its gross margin. Yesterday's trading update suggested gross margins were down on last year (when they fell 240 basis points) but that the trend was improving, helped by sourcing more goods from the Far East.

Halfords, bought from Boots by the private-equity group CVC, is expanding fastin the UK and beyond. Next year it hopes to open a store in Czech Republic, where car spare parts is big business. Closer to home, where it has 408 outlets, it sees big potential from opening smaller "neighbourhood" Halfords - much like Tesco has rolled out its Express stores. It has 10 and sees scope for another 60.

Its shares have long been a stalwart of this column and, on a price ratio of less than 14 times earnings, do not look expensive. Buy.

Business Post

Our view: Sell

Share price: 420p (+10p)

Competing with Royal Mail is hard work. Business Post should know - the alternative mail carrier has been at it for more than 25 years. Its first-half performance looks encouraging, but the crunch will come over Christmas, which means the jury is out on whether the group deserves its current valuation.

Business Post comprises three separate operations: Parcel Services, UK Mail and Specialist Services. Performance at the latter two divisions was most encouraging, with revenues from UK Mail jumping 156 per cent against last year's figures. Specialist Services, the smallest part of the group at 11 per cent of revenues, includes same-day courier delivery and palletised goods. Growth in the division was an acceptable 3.5 per cent.

The problem child is Parcel Services, which accounts for approximately 63 per cent of the group's top line and where revenues declined 3.4 per cent to £94m. The company is converting a number of loss-making franchises into corporate ownership. So far, it has taken a one-off hit of £3m, but these franchises are still losing money and investors cannot count on its ability to turn them around. Its shares trade on a forward price-to-earnings ratio of more than 28 times its 2007 numbers, according to the broker Altium Securities. Even if the company does manage to wipe out losses at its franchises and continue growth at UK Mail, it is asking a lot to justify the share price.


Our view: Hold

Share price: 592.5p (-2.5p)

It's not the best moment to be in the home credit market - or doorstep lending as the rest of us call it. The AIM-listed S&U, the third-largest player in the industry, announced first-half pre-tax profits yesterday that were down almost 10 per cent from £5.3m last year to £4.8m for the six months to the end of July 2006.

S&U blamed "more challenging" trading conditions. That's to put it mildly. Increasing bad debt, as Britain's unsecured debt mountain climbs ever higher, has hit even lenders at the top end of the scale, never mind the sub-prime market in which S&U operates. Then there's the intense regulatory spotlight under which doorstep lenders have been operating - the Competition Commission recently suggested the sector has been making persistently excessive profits from their customers.

S&U's managing director, Anthony Coombs, says the Government's "blizzard of initiatives" in this area has "distorted and disturbed relationships with customers". On the other hand, as prime lenders tighten credit controls, lenders such as S&U will be serving a larger market. And further consolidation in the sector is likely - several smaller players have already merged or closed. Hold.