Plain vanilla mortgages give HBOS the edge

Gallaher priced a little high; Carpetright on a roll but take profits
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HBOS, the newest addition to Britain's club of mega high street lenders, has built a reputation as a bank which charges in where others fear to tread.

In 2001 it pulled off the bold merger between Halifax and Bank of Scotland at a time when most banks were wringing their hands about consolidation due to fears that either the competition authorities, or investors, would not like it.

HBOS also cannily scooped, for a bargain basement price, the assets of the distressed Equitable Life - boosting its plan to leapfrog insurers to become the number one player in the pensions, savings and investment market.

Already Britain's largest mortgage lender, HBOS appears to be ploughing in with gusto to do yet more new lending. Yesterday, in its final update ahead of full-year results, it said new lending would be ahead of its 23 per cent share of the existing mortgage market.

While HBOS struck a slight note of caution, saying it had made lending criteria more stringent in the light of November's hike in interest rates, the bank's approach seems to be worlds apart from that of Barclays and Lloyds TSB. The two high street giants recently admitted to sacrificing market share due to fears that consumers were loading themselves up with dangerous levels of debt.

Yet HBOS's move should not turn out to be as risky as it looks. One advantage HBOS has is that the vast majority of its lending book is secured on homes, rather than credit cards and personal loans. HBOS has also become an expert over many years in making money out of plain vanilla mortgages, making its true risk profile a lot more conservative than banks which have latterly tried to pile into the mortgage market via niche areas such as buy-to-let loans.

At the same time, HBOS is building its business in other areas, continuing with its plan to sacrifice margins in return for market share, and is expected to have added one million new current account customers this year.

Despite having undergone rapid growth this year, HBOS's shares trades at a discount to the industry average. HBOS will end up looking very stupid if consumers' debts do get out of control next year. But that seems unlikely and the shares are worth a punt.

Gallaher priced a little high

In the wake of recent news that tobacco firms are being investigated for alleged price fixing by the Office of Fair Trading, at least there was some good news from Gallaher.

The maker of cigarettes including Benson & Hedges, Silk Cut and Mayfair said trading for 2003 was "in line" with expectations with a "robust" performance from the UK.

That is key considering about half the company's profit comes from the UK, where it has a market share of about 38 per cent and where it is number two to Imperial, which has a share of about 44 per cent.

But the business remains under pressure in the UK - the duty paid market fell by 5 per cent in volume terms in the first half of the year. Successive duty increases have led to an increase in the number of consumers getting their cigarettes elsewhere.

The price of a packet of cigarettes ranges from about £3.60 to about £4.60 with the taxman taking between 80 per cent and 90 per cent. Now there is the worry of an OFT investigation - something that is not wholly unexpected given the market is dominated by two players but something that could be hanging over the sector's head for years to come. The weakening of the US dollar will also have an effect since Gallaher's sales in places like Russia and Ukraine are dollar denominated, although that is a translational effect and less than 10 per cent of profits come from those regions.

Analysts are forecasting Gallaher to make a pre-tax profit of about £495m this year, translating to earnings of 55p, rising to about £540m and 60p next year. That puts the stock - a constant source of bid speculation - on a multiple of 10.7 times this year, falling to about 9.8 times for next. Given the uncertainty, that seems high enough for now.

Carpetright on a roll but take profits

Worries that the rug was about to be pulled from under Carpetright stock looked misplaced yesterday. Better trading news from Britain's biggest carpet retailer sent its shares 5 per cent higher to 804p.

After a tough few months, which saw the overall floor coverings market shrink by some 5 per cent, like-for-like sales at Carpetright are finally growing again. Okay, so a 1.8 per cent rise in the first six weeks of its second half hardly means the world has re-carpeted ready for Christmas, but at least the picture is improving.

Lord Harris of Peckham, the company's founder and chairman, shrugged off the gloom enveloping the industry. He said Carpetright could expand its near 30 per cent UK market share by offering better value and quality than its rivals.

Meanwhile its gross margin goes from strength to strength, as the group tackles inefficiencies in the supply chain and use its size to extract better terms from its suppliers.

Interim pre-tax profits rose 46 per cent to £31.9m for the 26 weeks to 1 November, flattered by property disposals.

After a good run, it could be time to take profits, especially given the lack of confidence in consumer wallets.