Bank on A&L's back to basics move paying off

Prepare to wait longer at Amec; Dobbies looks poised to bloom
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The Independent Online

Getting back to basics has been paying off for Alliance & Leicester, the high street bank. The 37 products weighing down its shelves this time last year have been cut to 12, focusing on four key areas - mortgages, current accounts, savings and personal loans.

The company says this sharper focus was improving growth and margins. The bank has been undergoing a vigorous cost-cutting programme that will save £100m a year. It sold off its credit card business in 2002, which has rid it of card fraud and credit risk, and it also sold off its low-profit, high-expense life insurance division.

Able to concentrate on giving more attractive deals on a smaller range of products, it ought to encourage its customers to buy more financial products from the bank.

Many fear a slowing housing market, which is not good for any mortgage business, but the credit quality of A&L's mortgages looks sound. Its average loan to property value is 75 per cent, which limits A&L's exposure to a drop in house prices. It said yesterday it had actually seen an improvement in mortgage payment arrears.

A&L has been quietly at work, getting on with exactly what it promised shareholders it would do. That is, double-digit percentage earnings growth for 2003 and 2004 and the first three months of this year show it is on course.

A share buy-back programme has helped. It bought back about £42m of shares in the first half of the year and analysts expect much more to come. Some have estimated up to £200m and this is good news for its earnings per share figures - with less shares to go round, there are more earnings for everyone else to enjoy.

A&L has a great dividend, yielding more than 5 per cent, above the average for the UK banking sector. And investors can be pretty confident this will not be cut. As the share buyback plan shows - this company is desperate to give its cash away.

A&L's shares trade at about 11 times the earnings forecast for 2003, which unfortunately means it is not one of the cheapest banks in the sector. But it is one of the best and a safe bet. There are not many stocks that offer both this earnings growth potential and such a strong dividend. Buy.

Prepare to wait longer at Amec

First, an overdue apology. When this column last wrote about Amec, the engineering group, at the start of 2002 we told investors to buy. That despite warning how waiting for a re-rating of the shares has been a bit like waiting for Godot. Well, 18 months on, the shares are a third lower, and we are still alone under the tree.

Under Sir Peter Mason, the chief executive, Amec has moved, albeit glacially, away from its low-margin past to focus instead on highly skilled niches in road and rail maintenance, and in oil and gas processing plant design and construction. A trading update yesterday again showed that it is the more mundane services to US industry that are weak while public infrastructure projects are still coming through in impressive numbers.

The shares have rebounded strongly in recent months thanks to Amec taking full control of Spie, its French business. The group was able yesterday to trumpet the extra skills this has brought in, and the rail maintenance work in the UK that would not have come its way otherwise. There was also time to highlight a string of big oil and gas contracts won in the last few months which will really start to boost earnings in a couple of years.

But Amec shares nudged lower (by 3p to 262p) amid signs that Sir Peter was trying to cool market expectations for the current year. For all the progress, Amec is still a low-margin business and a work in progress. The strong run has taken the stock to a valuation of 10 times current year earnings but there is still a 4 per cent dividend yield which is worth holding on for. New investors though needn't chase what is a long-term play in a year when earnings growth is suffering a pause.

Dobbies looks poised to bloom

Shares in Dobbies Garden Centres are more sensitive to the weather forecast than to the ups and downs of the wider stock market. The Scottish plant retailer had a great spring because the warm weather encouraged homeowners to spruce up their gardens; the wet May kept the green-fingered indoors; but this month's sales have soared with the temperatures.

The longer-term picture, though, is more steady and it is one of steady progress. Interim figures look back over the six months to April when sales were up 8.1 per cent at existing garden centres, with new store openings adding even more to the top line. Profits, too, were strong at £1.8m, up 11 per cent if the one-off gains from property sales last year are discounted.

The company is a creeper, moving south from its heartland in Scotland and the North of England. At the current rate its 17 centres will be doubled in five years.

The group is also planning on opening bigger sites, big enough to become visitor attractions as much as retail outlets. At its site in Atherstone it is actually opening something called Plantasia, a wildlife park with educational attractions on the life of plants.

Dobbies' growth plans are well funded from cash flows and an agreed overdraft and the shares (at 400p) trade at a justifiable multiple of 13 times earnings. The British obsession with home and garden should sustain Dobbies' whatever the weather. Buy.