The Investment Column: There's plenty for Taylor Wimpey to build on

C&C; Greggs
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The Independent Online

Our view: Buy

Current price: 330.25p

Business academics have spent a long time arguing over the benefits of mergers - there is a fair argument to say that demergers create more value for shareholders, at least in the short term. So Taylor Wimpey's increased £750m share buy-back could be seen as a sweetener for shareholders while the deal gets over the inevitable teething problems.

Formed just this month by the merger of the house builders Taylor Woodrow and George Wimpey, yesterday's results were themselves slightly academic - the ink is hardly dry on the paperwork, so the numbers were still in effect those of two separate companies.

First-half revenue for the combined group was £2.7bn, leading to pro-forma pre-tax profits of £140.9m post exceptionals, with margins raised to an impressive 11 per cent. Of more interest are the expected synergies, which are now on target to hit £100m, £30m better than previously estimated.

The group has been forced to make an £86m provision against its US landbank, including £25m earmarked earlier in the year, and with the housing market on the other side of the pond stuck firmly in the doldrums, more write-downs cannot be ruled out. But the landbank in the US is well spread geographically, just as it is in the UK, and is still worth more than $1.4bn.

Despite the attention lavished on the house-building sector and a wave of consolidation, the stock remains attractively priced. The shortage of new housing in the UK is also well documented, with government estimates pointing to about 250,000 new homes required in the next five years. The interest rate cycle looks to be peaking, and even if house prices are artificially high (which by almost any measure they are) demand looks solid for the foreseeable future.

Priced on just 7.5 times forecast 2008 earnings with a prospective yield of more than 5 per cent, Taylor Wimpey looks good value, and in the medium term there looks to be more upside left. Buy.


Our view: Sell

Current price: €6.00

It looked like being another bumper year for C&C, the Irish brewer behind Magners, back in April during a spring heatwave. Since then we have had the wettest July on record, drinkers have been heading indoors, and a hot cup of tea has been a more attractive prospect than ice-cold cider. So yesterday's second warning in under a month should not have come as a surprise. Since C&C first warned on 14 July, most of Britain has remained soaked, and the company now expects half-year operating profits to come in at least 35 per cent lower than last year.

The problem is that C&C's business is heavily weighted towards the summer months, and the proposed European expansion, while in principle a good idea, is still a long way off. It is hard to see how C&C can make any sort of meaningful short-term recovery.

As is often the case, the success of Magners has been a triumph of marketing over substance. The drink itself is not exactly outstanding, particularly when the dozen or so ice cubes it is routinely sold with begin to melt. Other cider makers have cottoned on to it, and the first-mover advantage Magners had appears to have fizzled out. It is difficult to get away from the feeling that Magners may be a short-term drinking phenomenon, like so many others in the past - bottle of Hooch, anyone?

Although C&C made no mention of its full-year €200m profit forecast yesterday, there must be serious doubts about its ability to make that number. Profit warnings often come in threes - and at the moment things are likely to get worse before they get better. The stock has halved in a month, but barring a bid the shares are still a sell.


Our view: Hold

Current: 4,910p

Unlike at C&C, cold weather is generally kind to Greggs the baker, as piping hot sausage rolls and the like tend to fly off the shelves during the colder months. But as with much of the high street, the shock summer deluge that kept punters indoors has cast a slight gloom over solid first-half results.

The group saw sales in the first half of the year grow 4.6 per cent, with operating profits up 24.5 per cent. This followed a concerted effort by the management to turn Greggs around after a year described by managing director Sir Michael Darrington as "the most demanding for well over a decade".

Since then Greggs has overhauled its regional management operations in favour of a central structure, and streamlined the Bakers Oven brand. It opened stores for longer, introduced a healthier range, and launched a £3m marketing campaign with Paddy McGuinness of Phoenix Nights fame.

Yet it suffered yesterday after revealing poor second-half visibility. Life will certainly not be easy with tougher comparatives, an increase in central overheads and rising ingredient prices likely to keep profits low. However, most analysts still believe it will perform in line for the full year.

The company has identified its core problems and reacted quickly, with early indications that the shake-up is producing positive results. It has further initiatives to come, including further development of its healthy range, and if it can weather whatever storm 2007 has in store, it should see positive returns in the medium to long term. Hold.