Odds still in William Hill's favour
Kidde can be locked away for the long term; Lack of clarity makes Mowlem one to steer clear of
Friday 05 March 2004
Punters who had a flutter on William Hill's shares at flotation should be smiling all the way to the cashier. The going for Hill has been very good over the past year and its shares have been gaining ground.
The company yesterday said turnover was up 77 per cent and profits up 43 per cent. Growth was driven by a relaxation of betting rules that has allowed bookies to put fixed-odds betting terminals in their shops. These FOBTs are high-tech slot machines, allowing punters to play roulette while waiting for the next horse race to start. Hill's roll-out of FOBT has been fast and furious, but the growth prospects are nearing the line and it is unlikely that much more can be flogged out of them past 2005.
The entire market for gambling in the UK is about to expand, however, as arcane rules designed to protect the public from emptying its wallet are swept away. Bookmakers will be able to open more shops, which will threaten Hill, but it does have a strong brand on the high street to carry it through. Casinos are the big winners in gaming deregulation, as they will be able to open doors to all. This is an avenue Hill is considering.
The brand's strength has also helped draw in customers for online betting. Profits here were up 80 per cent last year. This is an area of high growth and Hill has already secured a slice of the market.
Shareholders are starting to reap the company's strong cash flow, as Hill increased its dividend by 44 per cent and promised more. It has also said it wants to buy back up to 10 per cent of its share capital. This could boost earnings per share by 5 per cent in 2004.
Longer term, Hill may lose out to increased competition from deregulation. But it is still odds on to generate plenty of cash and good growth for some time. We have been positive on the shares since flotation and even at last night's close of 484p, which puts the stock on a forward multiple of about 15 times earnings, there is still time to pile on for the final furlong of growth.
Kidde can be locked away for the long term
As celebrity product endorsements go, it's not up there with Britney doing Pepsi or Pele pushing Viagra. But Kidde was clearly chuffed yesterday that it has bagged Rudy Giuliani to advertise its fire alarms on US television. New York's former mayor is fronting the fire safety's group's latest campaign to educate people about protecting their homes with smoke detectors, carbon monoxide monitors and other Kidde products. Which makes it ironic that consumer sales were the only minor disappointment in the company's better-than-hoped 2003 results, published yesterday.
Sales have snapped back in the early months of this year, though, and the outlook for the group as a whole is rosier than it has been since Kidde was demerged from the old Williams conglomerate in 2000.
Spares for fire safety systems in civil aircraft should pick up this year after the post-11 September tumble in air travel. A buoyant US economy should also start to encourage business to invest in new factories, where alarms, sprinklers etcetera are required by law.
This outweighs the negatives, such as the weak dollar (in which Kidde conducts more than half its business) and the worry that we have passed the peak in demand from the military, to which Kidde sells temporary bridges for getting vehicles across ravines, as well as safety systems for aircraft.
Strong cashflow and recent debt reduction means Kidde can pick up the pace of acquisitions, particularly in central Europe. The shares, at 104.25p, offer good long-term growth and a 3 per cent dividend. Hold.
Lack of clarity makes Mowlem one to steer clear of
Sir John Gains, chief executive of the construction group Mowlem, rubbed some people in the City up the wrong way yesterday. His company's results came in a little shy of forecasts, barely two months after a trading update that failed to signal a restructuring. Mowlem is combining its infrastructure business (which works on railway projects, for example) with its core construction division, and taking the opportunity to write off bad debts on old projects. Sir John was vague on the costs involved, on the savings that might be achieved, and what all this might do to 2004's results. Analysts left a meeting with a bad taste in their mouths but, to be fair, they are still positive on the company's shares.
Mowlem has won plaudits for its work through the Private Finance Initiative, in which private companies jointly fund public sector building work. Last year's £45.2m profit contained a one-off £15.6m from the sale of Mowlem's stake in the PFI that extended London's Docklands Light Railway. The company is also expanding in support services, through building maintenance contracts and one of the UK's biggest cleaning firms.
This is all low margin work, of course, and the uncertainty created means Mowlem shares (down 10 per cent to 200.25p) will not soon narrow the valuation gap with their peers. Avoid.
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