The Investment Column: Time to sell as brokers lose thirst for S&N takeover talk

Bellway; Vortex
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The Independent Online

Our view: Sell

Share price: 606.5p (+.5p)

Scottish & Newcastle has been on a bit of a rollercoaster ride. Shares in the UK's biggest brewer have been rising steadily since the end of March, gaining 50p on speculation that trade rivals, Heineken SABMiller or Carlsberg, were eyeing up the company. Following a spike last Friday at 601.5p, investors booked profits at the beginning of this week, sending the share price down, only for it to rise again on talk that Diageo had thrown its hat in the ring and private equity were becoming interested.

However, yesterday brokers poured cold water on the takeover heat. Both ING and Dresdner Kleinwort downgraded the stock and said a takeover was unlikely. Diageo and SABMiller are not thought to have any desire to increase their exposure to western markets, while Heineken would face stiff regulatory hurdles. And while Carlsberg's management is seen as making good progress, S&N's management has a stronger track record.

Although private equity would be attracted to the strong cash flows of the brewer and wouldn't mind the chance to break up the group, analysts say S&N is not a turnaround or cost-reduction story. Management has already achieved that in the previous three years, therefore a private equity bid is seen as unlikely. So the market may have been overly optimistic in preparing for a bidding war for the group. In February, the brewer whose brands include Foster's, Kronenbourg, Strongbow and Baltika, Russia's top-selling beer, posted a 13.9 per cent rise in pre-tax profits, driven by strong global growth, particularly in Russia. Pre-tax profits reached £452m for 2006, while the group saw an 8.9 per cent rise in net sales. However, it warned that the extension of the smoking ban, which comes into effect in England in July, will wipe £10m off its profits as the UK pub market declines by as much as 5 per cent this year.

With takeover talk off the boil, it is time to take profits. Sell.

Bellway

Our view: Buy

Share price: 1,690p (+25p)

The mid-sized housebuilder Bellway is to stay out of the consolidation fever again gripping the sector, if it can help it. Yesterday the company provided evidence of why it does not need a tie-up, announcing that it had landed a £1.2bn deal with Leeds City Council to develop 5,000 new homes and community facilities - including schools and GP surgeries - over a 20-year period. The development will be on council-owned land. Bellway will pay for the land in stages, as it builds the homes, with the money raised used to build the community facilities.

The company is in talks over an even bigger scheme, at Barking, at London's extreme east, which would see it put 10,500 homes on a council site. Bellway has ambitious organic growth plans. It built 7,100 homes last year. It aims to get to 10,000 units by 2010.

Just last month, Taylor Woodrow and Wimpey announced a £5bn merger, which will create the sector leader, producing 20,000 homes a year. There are two other big players in the industry, Persimmon and Barratt. But Bellway's convincing point is that bigger isn't always better. While Persimmon is a highly regarded company, the profit margins at Barratt, Taylor Woodrow and Wimpey are all significantly below the 19 per cent reported by Bellway at its last results.

Bellway has plenty of room for growth, subject to the planning system delivering the required land, as Britain produces far fewer new homes each year than required. So Bellway will not be seeking a merger partner and, if anyone wants to have a pop at the company, they better be waving a very large cheque. Buy.

Volex

Our view: Buy

Share price: 141.5p (-10.5p)

Volex believes it is plugged in for significant progress over the next few years, despite missing expectations over the past year. Shares in the Warrington-based manufacturer of cables used for aircraft, consumer electronics and agricultural machinery took a knock on the back of its guidance that it would miss forecasts for the year to 1 April as a result of high copper prices and a weak US dollar. Shares slipped nearly 7 per cent wiping out gains over recent weeks on the back of the warning, but analysts were more confident that momentum remained positive. Volex has restructured its manufacturing base over recent months and the benefit of those actions will complement the company's plan to boost sales in the year ahead. Prospects are good for all of the company's divisions, particularly the power-cords business that is set to benefit from new products such as Apple's iPhone, while the interconnect business is set to grow on the back of exposure to the rapidly growing Indian wireless infrastructure market. A recent contract win with Rolls-Royce should also underpin its momentum in the defence business. With the stock trading on less than 12 times fiscal 2008 forecasts, the shares look wired for growth. Buy.

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