The Investment Column: Morgan Stanley builds a case for Redrow in slower housing market

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The Independent Online

Not all housebuilders are the same. There are fundamental differences between the business models of the volume builders, and they can be more or less exposed to the highest-risk areas of the market.

It might seem that shares across the whole sector move in one direction or another on the back of better or worse housing market data, but over the longer term there are real differences between share price performances. You'll want to be in the right stocks.

Which is why an investment note published by Morgan Stanley is coming in so useful in the City. The piece, "Sorting the men from the boys", takes a neutral stance on the sector as a whole but tries to pick some winners and losers in the likely slower housing market we are entering.

If there is a single headline it is: don't plough your money into companies which make a lot of flats. "In a more challenging 'buyer's market', we believe that apartments will fall out of favour relative to houses. In addition, these same apartments have greater interest from the more discretionary buy-to-let investor," the analysts wrote.

As you can see from our graphic, Barratt Developments is looking dangerously exposed if buyers find they can afford to go after houses instead of settling for a flat. It is no coincidence that Barratt, with 49 per cent of its output being flats, is also the most heavily reliant on buy-to-let purchases, which might dry up if it looks as though there will be little capital gain from a buy-to-let investment.

To make up for slower inflation and to try to match 2004's record year, most housebuilders are hoping to step up the numbers of homes they sell. This will be a particular struggle for George Wimpey because it is resistant to part-exchange marketing deals. Its shares have an "underperform" rating.

Differences in share price valuations should also be a part of calculations. Persimmon's premium to the sector, admittedly the result of its strong operating record, makes it look vulnerable. But Wilson Bowden, which also has an experienced management, looks too cheap compared with the value of its assets.

So, what is Morgan Stanley's favourite? It is Redrow. Its shares have underperformed its peers, but it has been testing a new "Debut" branded housing for first-time buyers, which gives it a competitive edge and allows it to tap a very strong latent demand for affordable homes.

Time is right for a flutter with IFX

Here's a real gambler's stock. IFX, which owns the spread betting firm Finspreads, has been a disappointment over the past couple of years, most recently because it lost a load of money to its foreign exchange clients when the dollar collapsed last year.

The company promises it has tightened up its internal risk management procedures, to make sure it is never out on a financial limb, and now would seem an opportune moment to take a punt on IFX shares.

They were up 2.5p to 110p yesterday after results which showed an improving trading performance. Its clients tend to bet more when financial markets are volatile, and volatility is up.

IFX is operating in a highly competitive market, with new spread betting outfits springing up to offer basic bets, and forcing IFX to launch more sophisticated instruments. Shortly, it will launch "binary bets", aimed at the bored trader who wants a bald punt on whether an index or stock will be up or down over a given period. There are also moves afoot to start marketing in China and other overseas territories.

Investor interest in this business has been piqued by the recent float of rival IG Group. Have a flutter.

FKI fails to excite but hold on for the yield

No, you can't say that we make conveyor belts. We make hi-tech, high-speed distribution and sorting equipment for use in demanding postal offices and US airports. No, you also can't say we make hooks, because we actually make world-class hoists, chains and fitting to satisfy specialist industrial lifting requirements. And...

Oh, all right then, you can say we make door handles.

FKI has done a good job at slimming down its portfolio of diverse engineering businesses and focusing them, where possible, on specialist niches where it can demonstrate a superior product and charge higher prices. The trouble is, there are still a large number of mundane products within the business, even now, and the prospects for the group as a whole are mixed.

The company is continuing to churn its portfolio of businesses, with more disposals and acquisitions to be expected over the next year. Meanwhile, the businesses are being run efficiently enough, cash flows remain robust, and the company's £351m of debt looks servicable. The trouble is this level of debt will long be a burden for a business that must innovate if it is to thrive.

News on forward orders, released alongside some forecast-beating annual results yesterday, was positive across most of the core businesses. However, the "hardware" division - that's the rather unappealing door handles, locks and hinges division - was disappointing. A consumer slowdown makes the outlook there appear bleak.

FKI shares are worth holding for a dividend yielding 4.5 per cent on a share price of 101.75p, but they are not exciting enough to buy.