The Investment Column: Northern Rock solid but squeezed

Time to take profits in Intermediate Capital - Universal Salvage seeks hope from the wreckage
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The Independent Online

There comes a time in the life of every stock market darling when the honeymoon period of being able to do no wrong in the eyes of City investors comes to an end.

There comes a time in the life of every stock market darling when the honeymoon period of being able to do no wrong in the eyes of City investors comes to an end. There are signs that that time has come for Northern Rock, the super-efficient mortgage lender based in Newcastle, whose low-key roots belie the authoritative stamp the business has imposed on its multibillion-pound sector.

The Geordie bank was at pains to emphasise yesterday it was on track to deliver expected profits of £430m for the full year. But its pre-tax profits of £200m in the six months to 30 June did not wow the market, and were seen by some as a definitive sign the mortgage market is cooling down as customers struggle with higher interest rates.

There were also concerns about Northern Rock's margins. Already operating on the basis of taking a wafer-thin cut on loans, Northern Rock has been squeezed even further in recent months. That is because the cost of raising funds in the money markets has risen more steeply than the actual rise in the base rate, making it very difficult for lenders to pass on extra costs to customers. As the bank was quick to point out, the misalignment is likely to be a temporary problem, and by no means one which is restricted to Northern Rock.

Northern Rock is also showing it is able to cut costs further, while still punching above its weight in its share of new mortgages. Compared with its 5 per cent share of existing mortgages, it is snatching 8.4 per cent of new loans, adding that its pipeline of business yet to be signed and sealed was a record £6.4bn. Trading on 9.5 times future earnings, Northern Rock's stock is not expensive and its shares have fallen 6 per cent since we advised investors to sell earlier this year. There seems little likelihood that while investors remain concerned the housing market could blow up in everyone's faces, the bank's shares will pick up speed. Long-term investors should take profits.

Time to take profits in Intermediate Capital

Intermediate Capital (ICP), the specialist provider of mezzanine finance for buyouts, escaped from the proverbial doghouse yesterday, selling its minority stake in Pets at Home - the animal food and toy retailer - at a healthy profit.

Since providing £24m of mezzanine finance for the group in 1999, when Pets at Home had just acquired its loss-making rival Petsmark, ICP has seen the company grow to a value of about £230m. It is believed to have at least doubled its money on the investment in five years.

ICP is undoubtedly one of the best in its sector, with yesterday's news providing yet more evidence of its nose for a deal and good timing. Its current book of UK holdings makes encouraging reading, including the fashion retailer Jane Norman and more established growth plays such as Pinewood Studios.

Investors' worry going forward has to be whether ICP can continue to find good deals in an increasingly shaky market.

Since this column tipped the stock 15 months ago, it has climbed more than 19 per cent. And over the past two years it is up almost 60 per cent. However, the shares have been sliding since hitting highs of 1,235p in March, and at 994p - more than 14 times this year's earnings - it now looks fairly priced. For those who have enjoyed the ride to the top, now may be the time to take profits.

Universal Salvage seeks hope from the wreckage

The most significant point about the annual results statement from Universal Salvage, the car-wreck salvage specialist, is that its shares shrugged off news of a loss and an axed dividend.

The share price was unchanged at a 2004 low of 61p after a year of unmitigated bad news from the company. The question is whether it is worth taking a gamble on the bad news being at an end.

The company sells wrecked cars, and the share price graph resembles a lump of scrap after falling from 500p since 2002. As predicted by the chairman, Alex Foster, the business has turned a £1.8m operating profit into a £4m loss for the year to April, after sales fell from £61.3m to £48.4m.

A mild winter did not help matters, reducing the number of crashes. But the main problem has been that old bugbear, European Union red tape. New rules have been set by Brussels for extracting commercially useful parts from car wrecks. This scared off Universal's normal customer base.

These shares are clearly only for the brave or foolhardy, and the management has much sorting out to do. But they may be worth a punt with money you can afford to lose.

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