The Investment Column: The UK is coming right for Wimpey

Northgate Info; Blooms
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The Independent Online

Our view: Hold

Share price: 447p (-11p)

There was a time not long ago when George Wimpey's UK business was a drag while its US operations were red-hot. Yesterday's trading update made clear that the opposite is true now.

The US housing market is in serious trouble, with some commentators predicting a crash, after a series of interest rate rises killed off the housing boom. This has hit Wimpey, along with other players in that market.

Conversely, the UK is coming right. George Wimpey has historically suffered from poor margins and a business that produced extremely uneven results across the year.

The head of the UK business, Pete Redfern, has just been made group chief executive. He was able to report yesterday that completions in the first half of the year in the UK were up 19 per cent - the highest level the group has achieved in the past 25 years. While the UK market was good, but not soar-away, during that period, Mr Redfern argues convincingly that most of the credit for this performance must go to the company.

Previously, UK sales were very much concentrated in a few weeks in the spring and autumn. That knocked the prices that could be achieved, as those are the most competitive weeks in the year. And it had negative effects on debt, costs and behaviour of employees. Now there is a better balance of sales through the year.

In the US, the forward order book is down 17 per cent, by volume. There is a tense period ahead for this market but the longer-term demographic trends are positive. There is much scope to improve UK margins but US worries mean that the shares are a hold.

Northgate Info

Our view: Buy

Share price: 78pp (+1p)

Northgate Information Solutions had an eventful 2005. The Buncefield explosion in December severely damaged its headquarters and data centres and slowed down work on key projects. Nevertheless, the £24.5m operating cost related to the explosion - which will be largely recouped from insurers - hardly dented Northgate's progress during the year. Revenue leapt 62 per cent to £332.7m as it benefited from its SX3 acquisition in Northern Ireland. Even more impressive was a 95 per cent gain in pre-tax profit to £30.6m. With operating cash flow up to nearly £50m, Northgate also paid out its first dividend.

Northgate has already added £50m in orders in the current year including a key education contract in Bristol. Education is a relatively new area for Northgate but the company is confident of winning more high-margin work as schools look to improve systems. But the main driver for growth is Northgate's core human resource outsourcing services. That division's order book increased 27 per cent last year and Mr Stone has ambitions to take the model outside the UK. He has held talks with takeover targets in large European countries including Spain, Italy, France and Germany and is looking for local distribution partners in areas like Turkey, Morocco, Egypt and South Africa. Mr Stone believes that such economies, with a high proportion of young people and burgeoning workforces, offer great growth opportunities.

Northgate is targeting organic revenue growth between 6 and 7 per cent this year and is also likely to make acquisitions. Sitting on a rating of less than 12 times 2008 projected earnings, the stock is good value. Buy.


Our view: Avoid

Share price: 64p (- 2.5p)

Garden centres are in the pink, at least as far as shareholders are concerned. First there was an extended takeover battle for Wyevale, then its new owner, Sir Tom Hunter, started building a stake in Dobbies. Which has thrust Blooms of Bressingham, a wallflower of a stock, into the spotlight.

Normally the thorn around other retail roses, garden centres have become hot property for investors because of the freehold sites that they own. This provides plenty of asset backing for shares that can get overlooked. Blooms owns 10 garden centres of which three are freehold.

The flip side is that 2006 has been a damp squib for gardeners, what with an Arctic March and May monsoons vying with the worst drought in decades to cause the most grief to the green fingered. A trading update from Blooms yesterday admitted that the group would struggle to make up for the poor Spring, knocking its shares.

In the 22 weeks to 2 July, like-for-like sales are 1.9 per cent lower, although total sales are 16.6 per cent higher. Its broker, Teather & Greenwood, cut its pre-tax profit forecast to £800,000 from £1m. Despite the possible bid interest, it's hard to justify the stock's hefty premium to the sector. Avoid.