Hold on to those Barratt shares

BTG; Ottakar's
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The Independent Online

Somebody, please, stop this housing boom. Barratt Developments' chairman, Frank Eaton, bemoaned the strength of the housing market yesterday, while unveiling results that showed his company doing incredibly well out of the soaraway prices. Surely some mistake?

Barratt is currently enjoying reservations up some 12 per cent on this time last year, but Mr Eaton thinks a modest drop in demand would help margins and ensure longer-term sustainability. It would take pressure off the land bank and bring labour costs down, too, helping to boost margins. Mr Eaton's prediction is for a "natural slowing" later in the year, that will push house price inflation down from between 10 and 15 per cent now to about 6 per cent.

Barratt has little to fear from a modest slowdown in the property hotspots of the South-east. Its developments are spread across the UK and range from £3m mansions to high-rise apartment blocks to "the complete redevelopment of Basingstoke". Its expertise at playing the local planning system, particularly when it comes to the use of "brownfield" land such as derelict factory sites, is acclaimed throughout the building industry. It has been able to increase completions by 10 per cent while the overall industry number has been flat.

Pre-tax profit in the second half of 2001 was £77.6m, up 23 per cent. Barratt's average selling price has risen 10 per cent to £132,200 and it has been carefully extending its land bank. Analysts upgraded their forecasts and reckon the full financial year, ending in June, will produce profits of £205m.

Barratt is about as good as it gets in the housing sector. It has managed stonking organic growth while some of its rivals have sought mergers to improve their land banks. It has the industry's best return on capital. And it looks to have returned its US business to sustainable profitability despite the collapse in the Silicon Valley housing market. Hold.

BTG

BTG, which searches for inventions and commercialises them, has kept its head down while the chill economic winds have buffeted the technology sector and – much to this column's disappointment – its own share price. The business environment "continues to create both opportunities and challenges for BTG", according to its trading update yesterday. Cash-strapped technology innovators are in more need than ever to license their inventions to the likes of BTG and valuations have fallen. But BTG's portfolio of 300 technologies is proving more complicated to sell on, since few customers want to part with cash up-front.

With BTG's shares attracting no interest and drifting down some 55 per cent since we last wrote on them, it will take a big deal or two to kick start them again. There should be such deals later in the year, including licensing out of new technologies to improve memory or battery efficiency in mobile devices, or in optical networking.

There should also be the delayed start to US trials of its Varisolve foam, injected into varicose veins as an alternative to surgery. Even on the most conservative analysis of potential sales, this product is worth the BTG share price alone.

There are undoubtedly some huge hits inside the company, if only the market for tech shares can recover. Meanwhile, revenues from drug products on the market, plus its 2 per cent share of smallpox vaccine revenues from the little biotech company Acambis, mean the downside must be limited from here. At 564p, the stock is a buy.

Ottakar's

Is there no end to the magic of Harry Potter and The Lord of the Rings? Results from Ottakar's yesterday showed that wizards, young and old, have worked their spells on the bookshop operator's profits.

Merchandise linked to the fantasy tales – toys and games and the like – helped increase Ottakar's gross margins. The retailer expects more products and improved terms with suppliers to boost margins to more than 40 per cent this year. And with a film already lined up for Whitbread award-winner Philip Pullman's Amber Spyglass trilogy, Ottakar's predicts another wave of tie-ins is on the way.

The chain now has 78 shops across the UK and plans 15 more this year, starting with eight acquired yesterday from the administrators to James Thin for £1.6m. It is well placed to tap into the UK's growing thirst for reading in a market that is expanding by 5 per cent a year.

Pre-tax profits for the year to 26 January leapt 43 per cent to £4m. A 4.5 per cent increase in like-for-like sales so far this year puts the group on track to meet profit forecasts of £5.1m. For a growth stock, the shares, up 7.5p to 173.5p, look cheap on a forward price-earnings ratio of 10, falling to 8 in 2003. Buy.

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