Bottom Line: Little power in Wimpey's bounce
Wednesday 16 March 1994
Despite the better figures, which reflected the savagery of last year's write-offs, the trading improvement is muted and confined to the housing operation. Elsewhere, there is little to smile about.
Wimpey is not alone in struggling to make a profit from its UK contracting business, almost certainly making a second-half loss. With the banks propping up too many weak players, construction is not going to improve for the foreseeable future.
Going overseas to make up the margin shortfall in less competitive markets makes some sense but also carries a higher degree of risk.
A downbeat assessment of the minerals operation suggests that only further cost-cutting will help margins and profits in 1994. The unsold rump of the property portfolio remains only half let.
This casts the spotlight on housing, especially the UK operation, where completions of 7,500 can safely be expected this year, probably at an average price of pounds 57,000.
An average operating margin of 8.5 per cent implies profits of pounds 36m, the bulk of a total group profit of pounds 50m. Strip out pounds 10m of interest and a 25 per cent tax charge, and earnings per share emerge at 8p.
A prospective p/e of 26 is asking a lot. It only falls to 19 by the end of 1995 and it hardly reflects the risks inherent in changing the balance of a business. Expensive.
New story needed
MIRROR Group Newspapers may have achieved impressive profits growth this year, but its share price rating, at about 13 times this year's earnings, is still below even sickly looking rivals like United Newspapers, and well below groups like the Daily Mail & General Trust.
That is because the City has no real idea where future growth will come from. In 1993, underlying profits growth was primarily the result of cost savings from new technology, rather than higher revenues.
For the next year or so, the group will continue to enjoy the fruits of those savings, one reason many analysts are talking about pounds 85m of profits this year, and possibly pounds 100m next year.
But at 24 per cent (up from 21 per cent in 1992), MGN now has the highest trading margins in the industry. It is hard to see there being much more fat left to cut.
Unfortunately, MGN is a pure play in a declining business. And as yet there are no signs of diversification. The shares are likely to have only limited upside until such time as MGN finds a new story to tell.
Williams kicks habit
IN SOME ways the most revealing part of Williams Holdings' preliminary results statement yesterday was footnote 10 dealing with its modest pounds 157.6m of acquisitions during 1993. Book value of the acquired companies was pounds 42.4m and their ascribed 'fair value' was almost exactly the same at pounds 42.3m.
Williams has successfully kicked the outlawed acquisition provisions habit. The cost of reorganising the new companies, now charged directly to the profit and loss account rather than swept under the carpet, was, not surprisingly, a relatively modest pounds 3.1m.
With its store of reorganisation provisions exhausted and newly embarked on a focused path, Williams' hope must be that the stock market will begin to attach rather more quality to its earnings.
A cash inflow of pounds 78.5m before corporate activities was also encouraging as many have found it hard in the past to reconcile Williams' high reported operating margins with disappointing cash generation.
But the need to rebuild cover means sluggish dividend growth despite every likelihood of above-average earnings growth. A yield of 4 per cent at 407p and a probable 1994 p/e of 18 is more expensive than BTR, which seems out of kilter.
BY ANNOUNCING its flotation price while the terms of Beazer's issue are still clear in the institutional mind, Wainhomes invites comparison. By opting for a higher rating than the national builder, it is also taking a calculated risk with the continuing enthusiasm of the market for the sector.
At 170p, Wainhomes will raise pounds 30.5m and be valued at pounds 105.8m. On the basis of forecast profits of pounds 6.1m and earnings per share of 9.3p in the year to March 1994, the shares will start dealings in two weeks time on a p/e of 18.3 times and a yield of 3.1 per cent, according to the notional 4.2p dividend.
Those figures, which compare with 14.5 times for Beazer and a 3.8 per cent yield, do not seem overly generous.
Profits are not on a huge growth tack, valuations in the sector are being questioned seriously for the first time and Beazer and Redrow will be much more marketable. Leave this one.
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