Investment Column: Taylor Woodrow hits a ceiling

Mouchel Parkman still driving growth; Painkillers not enough to ease the pain at CeNeS
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The Independent Online

Like all UK housebuilders, the question dogging Taylor Woodrow remains: "Is the housing market about to crash?" The question irritates Taylor Woodrow, as it has not experienced plunging sales or prices.

That was the opening remark by this column on Taylor Woodrow's annual meeting trading statement last year. It is just as valid today, after yesterday's annual meeting statement when the new chief executive, Iain Napier, told shareholders trading was in line with expectations. The shares eased 1p to 284p, but it inspired at least one broker to upgrade its recommendation.

The shares have made good progress in the past year, reflecting the continued resilience of the housing market, which yielded Taylor Woodrow a 32 per cent increase in 2003 profits.

While the housing market shows little sign of turning down, it is faced by a Bank of England governor, Mervyn King, who is determined to keep raising interest rates until prices cool. In Mr Napier's view, though, they are not that hot anyway. Taylor Woodrow's prices are rising at only 5-6 per cent, compared with Halifax and Nationwide claims of about 15 per cent. Mr Napier says the difference is explained by the lender surveys not allowing for the impact of home improvements and equity release. He reckons planning permission is holding annual supply 60,000 units below demand - but the party has to end some time.

Operations in the US, Canada and Spain are performing well. The once-mighty commercial construction side is mothballed, held ready only to inject offices or shops into housing developments with mixed planning permission. The company is on course to squeeze £25m cost savings from the acquisition of Wilson Connolly last year.

The shares are on 5.4 times earnings and yield 3.7 per cent. We have called the housing market wrong in the past - we said "avoid" Taylor Woodrow shares at 201p - but with the risks of a crash growing, it is not the moment to be adding to holdings in the sector.

Mouchel Parkman still driving growth

Maintaining the M25 is a pretty thankless task, but at least Mouchel Parkman, the rail, roads and utilities contractor, has been making money out of it.

Yesterday saw the group post its first interim results since Mouchel, the road management specialist, took over Parkman, an engineering and contracting consultant, last year. The £78m merger led to £5.4m of exceptional costs, but ignoring these one-offs, the company saw underlying pre-tax profits rise by 37 per cent in the first half. Sales were up 32 per cent at £125.5m.

It also said it had won contracts to service water industries worth £73m, propelling its order book to a record level of £850m. It was only £724m three months ago. These figures should put paid to fears that the distraction of a merger would cause Mouchel to slacken off on new contract wins, and have beaten all expectations. The company goes into 2005 with 75 per cent of its expected revenues already in the bag.

Two thirds of its revenues come from its roads arm, and with more motorways planned, the opportunities here are strong. Further water contract wins are also likely, and even after the merger costs it still has £12m of cash in the bank. Cost savings from the merger are on track to deliver £2m in 2005.

Based on Seymour Pierce forecasts of £19m for 2004, Mouchel is trading at about 18.5 times forward earnings. This makes it pretty pricey, but its balance sheet is strong and its order book is solid, making its earnings capability in a growing market very promising. Worth a look.

Painkillers not enough to ease the pain at CeNeS

Investors in CeNeS Pharmaceuticals have had to endure a fair amount of pain over the years, so it is appropriate to see that the little biotech group has emerged, restructured, with a focus on two painkilling drugs.

The first of these is M6G, a slow-release version of morphine which could have fewer side effects than morphine proper when used to control pain in people who have undergone surgery. The company has good trial results under its belt, but the first of two make-or-break studies comes through in the second half of this year. (The second will be from a trial starting after that, which will pit M6G head to head with morphine.) Analysts hope M6G could have sales of £50m a year.

The second drug is at a much earlier stage of trials, and so the risk it will fail is much higher. Results are due next year to show if it is effective against the chronic pain caused by nerve damage. This could be a much bigger drug, with annual sales perhaps of £150m.

There is also a novel sedative due to start human trials soon, but this is a thin pipeline and the news flow over the next year or so is limited. We said the shares were worth a punt at 7.62p back in November and you may want to follow those investors who yesterday took profits and sent the shares down to 10.37p. Keep some in the medicine cupboard, though, for exposure to the biotech industry and for a potential takeover.

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