Put Bovis on hold until outlook clears

Bovis Homes; Emblaze; RJB Mining
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The Independent Online

Bovis Homes, the housebuilder, yesterday reassured investors that it remains on track to meet earnings forecasts, but the news was no surprise given the current strength of the housing market.

Recent surveys show that prices are rising at around 10 per cent a year, easily outpacing inflation.

Malcolm Harris, the chief executive, said Bovis is confident it can report successful full-year results provided – and this is the key point for investors – current market conditions persist.

There's the tricky point. Housebuilders such as Bovis are essentially cyclical investments that rise and fall with the UK economy, which has begun to look a little shaky.

Major influences that propelled Bovis' share price last year were falling interest rates and cheaper mortgage deals for many home buyers, combined with buoyant consumer confidence. But many economists believe that interest rates have bottomed out and will start to rise in the near future – possibly as early as today after the July meeting of the Bank of England's rate-setting Monetary Policy Committee.

The gamble for investors is that they must decide whether they believe the heat will go out of the housing market in the near future or whether it will remain buoyant for some time. The recent sharp fall in Bovis Homes' share price suggests that the market thinks the slowdown is coming.

The company has already admitted that growth in the first half has slowed, as work on many of its construction sites was held up by torrential rain that made last autumn the wettest for 125 years. Bovis expects that profits this year will be weighted towards the second half.

The company floated in December 1997 at 200p, following its demerger from shipping giant P&O, and is one of the best in its sector. The shares peaked at 398.5p earlier this year but have fallen back in recent weeks.

Analysts predict that Bovis will make pre-tax profits of £76.3m in the year to December, up from £67.1m in 2000, and earnings of 47.3p per share. The dividend should come in at 12.7p.

The shares, up 1p to 341.5p yesterday, trade on a relatively low prospective price/earnings multiple of 7.2 and carry a respectable dividend yield of 3.7 per cent.

Despite the low p/e rating, the shares remain a hold until the interims in September, when analysts expect that the economic outlook should be clearer and when Bovis reveals the extent of the weather damage.

Emblaze

Things have gone from bad to worse to horrible for shareholders in Emblaze Systems, the streaming video specialist. The Israeli group, once worth more than £3bn during the tech market boom, has now shrunk to just £255m.

Yesterday the company elaborated on its recently announced technology licensing deal with AlphaCell, which gave Emblaze a shareholding of 20 per cent for $6.4m (£4.5m). Emblaze insists that there is "clear synergy" between the two companies, because AlphaCell designs high-end next-generation mobile handsets.

The second reason for the company's statement to the market yesterday was that "management has noted the recent share price decline in the company's share price and sees no trading reason for this movement." Really?

For one, how about the desperate trading conditions gripping telecoms network operators and the even tougher times for equipment suppliers – key customer's for the company's products. For another, how about the fact that Emblaze continues to lose money before interest from its near- $400m cash pile is factored in.

More interesting is that Eli Reifman, the chief executive, recently invested a further £93,000 in the stock at 209p per share, taking his stake to over 10 per cent of the company. Encouragingly, Emblaze's market capitalisation is now entirely backed by cash in the bank. But even that cushion doesn't change the fact that following Mr Reifman's lead and buying the stock, up 8p to 190p, makes the shares of more interest to gamblers than astute investors.

RJB Mining

RJB Mining was floated in 1994 at 320p and soared past 600p a couple of years later. But the stock's performance has been a disaster since 1997, with the shares hitting an incredible 25p in early 2000.

However, the company, now called UK Coal, has been doing well over the last year, closing yesterday at 91p, down 3.25p.

Partly it has benefited from macro factors. The weakening of sterling against the dollar has pushed up the price of competing imported coal. And coal prices have improved generally. Also, it is a defensive play – with a 10 per cent dividend yield – in a world where technology businesses are imploding.

The group has received a £100m government grant this year. Richard Budge, the ambitious chief executive, departed in February. His replacement is Gordon McPhie, an accountant confirmed yesterday. He is seen as having a less grandiose, more investor-friendly vision.

The future is likely to see steady cash generation from mining, which will be used to develop the 55,000 acres of property the company owns for other uses, while the coal runs out over the next 15 years. That real estate has been valued at 65p a share, so the rest of the company comes cheap. BNP Paribas, the broker, is forecasting a pre-tax profit of £12m this year. Worth considering.

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