Investment Column: Amvescap - one for the long term

Don't build on indebted Westbury just yet; Relegate Game to a hold after its fall in sales
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The Independent Online

It isn't easy to put a positive spin on the internal forecasts erroneously sent out, and later formally published, by Amvescap yesterday. After just three months of the year, the transatlantic fund management group's performance is running below its internal budget target for the year. But worse still, those budget forecasts are a lot less than the figures currently expected by the market.

It isn't easy to put a positive spin on the internal forecasts erroneously sent out, and later formally published, by Amvescap yesterday. After just three months of the year, the transatlantic fund management group's performance is running below its internal budget target for the year. But worse still, those budget forecasts are a lot less than the figures currently expected by the market.

And if the market's expectations are not going to be met, then it is difficult to escape the conclusion that Amvescap's shares are, in the short term at least, not going to go up.

All of which is another blow to our optimism of last October, when we tipped this stock. Its run-in with the New York authorities over the market timing scandal (a hedge fund trading strategy which disadvantaged the little investor) has taken longer than expected to settle, which has pushed the shares lower. A fairly grim outcome is already being priced into the shares, though, and Amvescap is likely to have to keep its fees low as part of a deal. The hope is that, if this is settled by the end of June as planned, the shares can recover some poise. Institutional fund management business is not likely to be harmed in the long-run by the scandal and, in the detail of yesterday's first-quarter results, it seems the recent outflow of retail investor funds has more to do with performance issues than it does with the scandal.

The bigger picture remains that people in the US and in the UK, where Amvescap owns the Invesco brand, simply have to save more for their retirement. The bear market mauled confidence in the savings industry, but it will - slowly - return.

Amvescap reported a strong rebound in profitability in the first quarter, with profits before tax and goodwill up 48 per cent to £48.5m. It has cut costs across what is still quite a bloated organisation, with job reductions on course and more nips and tucks to come through this year.

Amvescap shares have been trading at a valuation a little below the sector average and that seems more than justified after the events of yesterday, but there is a long-term buying opportunity here.

Don't build on indebted Westbury just yet

Like all housebuilders, Westbury has been enjoying the robust demand and soaring profitability that comes with a runaway housing market. Unlike most in the sector, though, the company is relatively highly indebted and is struggling to increase the number of homes it is building.

This second point will become more important from this year, now that the company has promised it will raise the number of new completions from 4,400 - where it was stuck in the 12 months to 29 February - to 4,800 or even 5,000 this year. Volume growth beyond that will be tough, given Westbury's slightly disappointing track record in pushing applications through the UK's devillish planning regimes. Volume growth is needed now to make up for moderating house price inflation, which accounted for about half the 11 per cent increase in Westbury's average selling price last year.

With gearing at 58 per cent after the all-cash acquisition of Prowting, and forecast to reduce only to 50 per cent, Westbury is one of the most highly geared in the sector - and its shares will be fastest to fall if there is a sharp correction in house prices. That is not the most likely outcome, of course, since the demand for new homes is still growing much faster than supply, but even a modest slowdown in inflation will mean profit margins start to contract.

Via its Space4 venture, Westbury is pre-fabricating large chunks of its homes so as to reduce the need for skilled building site labour, which is in short supply and increasingly costly. And it has a joint venture with Bank of Scotland, which means it has more financial firepower to bid for brownfield land on which to put "aspirational" homes. Both are long-term positives, and there is also always the possibility of a bid, but the stock, at 464p, is only a hold.

Relegate Game to a hold after its fall in sales

A profit warning last year zapped the shares of Game Group, the computer games retailer, more effectively than any laser gun- toting creature from Metroid Zero Mission, which as you all know is played on the Gameboy Advance console.

The shares took a knock yesterday, falling 3.75p to 65p after the company's annual results statement. On the surface it looked healthy. Turnover up 8.3 per cent to £606.7m and pre-tax profits up 4.5 per cent to £34.7m, bang on the City's consensus. Earnings per share were up 10.5 per cent to 6.63p.

However, that is all history. What matters now is the future and it was Game's cautious outlook for 2004 that is unsettling the market. The company said it was anticipating a reduction in sales in the early part of this year, partly because of very strong trading last year driven by new launches which are not being repeated in 2004.

The first 11 weeks to 17 April of Game's current financial year has seen like-for-like sales fall 9 per cent. That sent analysts scurrying for their calculators, with Seymour Pierce pencilling in a 5 per cent like-for-like sales decline for the year as a whole. It has reduced its profit forecast for Game to £38.2m from £39m.

While a price-earnings ratio of 8.6 times for the current year sounds undemanding, we cannot change our cautious stance adopted last year. No compelling reason presents itself to buy the shares. At best, a hold.

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