Hanson tempts with dividend hike

Pendragon turnaround should boost shares; Outlook in IT sector leaves Diagonal a hold at best

Hanson, the building materials group, has been dominated by three issues of late: asbestos, asbestos and asbestos.

The market has been fretting about the company's exposure to potential legal claims against the construction companies Hanson has acquired over the years in the United States.

At first glance yesterday's full-year figures contained bad news on this front with a big jump in asbestosis-related claims in the fourth quarter. But much of the leap was the result of a rush of claims in the state of Mississippi to beat a 1 January deadline that barred out-of-state claims. The net provision made by Hanson to cover asbestos-related claims was in line with market expectations at $235m (£147m). Half of this is covered by insurance. And the 18,200 claims settled during 2002 cost a relatively modest $4.1m.

Aside from these legal issues, Hanson's main problem has been the difficult economy in the US, which accounts for 60 per cent of group profits. The US housing market has been strong but the commercial and industrial sectors have been struggling and road maintenance contracts seem to have been hit by lower state budgets.

There was better news in the UK, where Hanson is in line for some Heathrow airport Terminal Five contracts. And in Australia Hanson should benefit from the cross-Sydney tunnel and a big new road scheme.

But with underlying growth being constrained Hanson is looking to tempt investors with a higher dividend. The payout was raised by 10 per cent this time and the group is moving towards a more progressive dividend policy, backed by its strong cash flows. This new move in part makes up for a rather mean attitude towards the dividend in the past few years. But with net debt now down to £1.1bn from £1.4bn, the company says it is happier with its interest cover. All this certainly boosted the shares yesterday, which rose 6 per cent to 298p.

Assuming profits of £430m this year the stock trades on a forward price-earnings ratio of six and yields 5 per cent. That looks a decent hold, despite the asbestos fears.

Pendragon turnaround should boost shares

Last year punters were buying cars so quickly they were leaving skid marks on dealerships' forecourts. But this year is shaping up to be considerably lacking in va va voom for car dealers.

That, at least, is the picture painted by figures last month which show a drop in new car sales, and in the share prices of companies such as Pendragon, Britain's largest car retailer, which seem to be in need of a thorough MOT.

The outlook for dealerships is indeed uncertain. With signs of consumer spending slowing, and ongoing gloom in the global economy, it is little wonder that Trevor Finn, the chief executive of Pendragon, warned yesterday that new car demand would slacken in the coming months.

However, that is not the experience Pendragon has had so far. Its own sales rose last month, building on already strong growth last year. Pre-tax profits before exceptionals were up 16 per cent to £30.2m in the 12 months to 31 December. Its shares rose 6 per cent to 272.5p.

Pendragon primarily sells BMWs, Jaguars and Land Rovers and believes that by concentrating on the flashier end of the market it can weather the downturn. This is partly through acquisitions – it flagged up plans to expand its US business, where dealerships can make much higher margins on car sales than in Europe.

The company has also started to turn around its loss-making Ford business and aims to break into profit this year.

Analysts forecast flat profits for 2003, with earnings growth rising due to the company's share buyback programme. That puts the shares on a p/e ratio of seven times, which is cheap compared with its sector. Buy.

Outlook in IT sector leaves Diagonal a hold at best

IT services companies have been having a rough time since their customers cut down on spending on technology and Diagonal is no exception.

Its shares slumped 14 per cent to 46p yesterday after its results for 2002 came in beneath expectations and it warned that the current year is likely to be "challenging". Profits for the year to 29 November fell to £5.8m, before the amortisation of goodwill, from £7.5m a year earlier. After goodwill charges the group made a loss of £2.3m.

The business suffered across the board although its SAP consultancy business, where it implements SAP technology, held up reasonably well. Overall consultancy sales were down 21 per cent, which included a 4.4 per cent drop in revenue from the SAP consultancy. The other good piece of news was that margins improved in all its divisions, resulting in a group gross profit margin of 31.5 per cent, an increase of nearly 3 percentage points.

The business also has a healthy balance sheet with about £14.4m of cash although it has agreed a small acquisition for a maximum of £2.7m.

But against the backdrop of tough economic conditions the outlook for IT services companies is poor. Analysts downgraded their 2003 profit forecasts to about £5.3m yesterday. That puts the stock on a forward rating of 10 times. Given the weak outlook, a hold at best.