Housebuilders have room to grow

Time is not yet right to pursue Psion; Aggregate Industries looks a solid buy
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The Independent Online

Rising house prices and a shortage of supply can only really mean one thing for housebuilders - ongoing bumper growth.

No surprise then that George Wimpey and Ben Bailey, a small housebuilder based in the North, said yesterday that 2003 profits would be at the top end of expectations.

The question remains how long can the good times continue to roll for the property industry? After all, house prices are cooling off (Wimpey said yesterday it expected house prices to be stable or "gently rising" in 2004) which gives way to fears that housebuilders' earnings will follow.

Prices are likely to be propped up by a shortage of new housing: the Barker Review into the UK housing market published last week said housebuilders were not developing their land banks quickly enough, keeping prices high. But any effort by the Government to change this could mean prices drop. For Wimpey and Ben Bailey, this is largely irrelevant: both have strong land banks, which means they can keep their building rates up and continue to grow next year.

Wimpey said yesterday its order book was 13 per cent higher by value going into 2004, and 5 per cent by volume. Volumes should stay healthy into 2004, even if prices start to fall.

It benefits from being geographically well spread, and its average house price is £167,000. The acquisition of Laing Homes has captured higher-priced business, but still shields the business from the upper end of the market, where prices are more volatile.

For Ben Bailey, house prices in the North of England are still rising strongly. Four years ago, the company was struggling with costs over-runs. But strong management, and a focus on affordable homes - its average selling price is £148,000 - have turned the business around. At 372p, it is trading at around five times earnings, making Ben Bailey a good one to build on.

Wimpey, at 332.5p, also looks pretty cheap at 5.2 times 2003 forecasted earnings. This is around 15 per cent below the sector average. With strong earnings potential for 2004, Wimpey also looks good value.

Time is not yet right to pursue Psion

Since Psion exited its consumer handheld computer business, the company - whose name stands for Potter's Scientific Instruments or Nothing, after founder David Potter - has been left a strange hybrid.

These days it sells technology systems to industrial corporates whose workers use the gadgets to input data when, for example, wandering around warehouses calculating stock.

But Teklogix, as that business is known, is largely irrelevant to its value. For several years, Psion's share price has hinged on the estimated value of Symbian, the private technology company of which it owns about a third.

Symbian, which is expected to be floated eventually, is battling to make its operating system the technology of choice in the mobile handheld market, where it competes with Microsoft. And it is having some success. In the first nine months of this year, nearly 4 million phones containing the Symbian kit were shipped - up from about 1 million the year before.

At the peak of the dot.com boom, the most bullish analysts put Symbian's worth at as much as £5bn to £7bn. These days, the estimated value is more like £500m to £1bn.

As for Teklogix: like its peers, it is coming out of the doldrums. Analysts forecast about 5 per cent growth, and there was nothing in yesterday's statement to make them move their forecasts. They are predicting losses for 2003 and a small profit for 2004, giving earnings of something like 1.8p and putting the stock on a multiple of around 47 times.

That looks expensive. The stock has already rebounded hard this year and, with so many unknowns, there will undoubtedly be better opportunities to buy into the story.

Aggregate Industries looks a solid buy

Fears of a downbeat trading statement from Aggregate Industries, the quarries and ready-mix concrete group, hurt the stock quite badly last week.

In the event, the statement yesterday was okay. Yes, the company has big exposure to the US market - about half of both turnover and profits come from the region.

Not only is trading there tough - made worse by unusually bad weather which delayed the start of the main trading season - but there is also the impact of a weak dollar. Partly offsetting that is the fact that some 80 per cent of its borrowings are in dollars so the interest charge is lower.

Nevertheless, forex movements knocked about 10 per cent off pre-tax profits before interest in the first half, and should have a similar impact in the second half.

The good news is that the UK business is doing well - meaning that overall, the group's performance is in line with expectations.

Trading in the second half has been "very strong" in Britain, benefiting from the northern bias of its business where there has been a high level of activity. Asphalt volumes rose thanks to increased highway maintenance and infrastructure work, while ready-mix concrete volumes were also up.

Analysts expect a profit of £138m to £139m this year, giving earnings of about 6.8p and putting the stock on a rating of about 12 times. Assuming no further major depreciation of the dollar, the recent slump in the share price makes the valuation interesting. Buy.

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