Put your hard hat on for punt on Wilson Connolly

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The Independent Online

Earlier this week, we wrote on Wilson Bowden, one of the most profitable and efficient businesses in the housebuilding sector. A trading update from Wilson Connolly yesterday gives us the opportunity to compare and contrast with its unrelated almost-namesake. Wilson Connolly is one of the least profitable, least efficient companies in the sector, but it has called in a new team of master builders (led by the Post Office boss Allan Leighton as chairman and Graeme McCallum) to fix the subsidence in its share price and fill in the cracks that appeared during a disastrous year in 2001.

The new hard hats at the top have made job cuts at head office, demanded more standardised building work by its regional offices (which will cut design costs and allow raw materials to be bought in bulk), and has also sharpened the commercial attenae of its land-buying team. Margins, which had dipped below 10 per cent, are creeping back towards the company's target of 15 per cent, just shy of the industry average.

Meanwhile, the soaraway housing market, where new houses have been seeing strong inflation (although not as much as for second-hand homes), has helped, too, and Wilson Connolly was able to trumpet a 10 per cent increase in the value of forward orders over this time last year.

Wilson Connolly is often tipped as a likely candidate for consolidation, as the larger players snap up mid-tier rivals. This might support the share price, but there were reasons to be careful in yesterday's statement. In common with the rest of the industry, visitor numbers are flat at its sites across England and Wales and reservations are down as the housing market slows.

Down a tuppence to 184p yesterday, the Wilson Connolly share price, calculated as a multiple of earnings, stands at a premium to the rest of the sector, representing the market's hopes for a continued recovery. That makes them riskier than others in the sector, particularly now the easy margin improvements have been won. Investors will have fewer sleepless nights holding Wilson Bowden through the coming period of slower growth in house prices.

Wrap up International Greetings

It has been a year of recovery at International Greetings, the AIM-listed group that designs and makes greeting cards and wrapping paper. After a profits warning in Christmas 2001 due to problems in its UK division, the management has been concentrating on sorting the operational problems that led to a dip in profits after 21 years of growth.

That warning provided a serious jolt to a business which has licensing agreements to produce character merchandise, including cards, gift wrap and stationery featuring Winnie the Pooh and Barbie. Harry Potter is also another boom area and the next big thing is The Hulk film, due out in a fortnight, with International Greetings producing special display units for retailers. Also in the pipeline is a deal on Shrek 2, set for release in July next year.

The business looks in a strong position after a 22 per cent jump in full-year pre-tax profits to £11m on sales that were flat because the group decided not to chase lower-margin business. The company has net cash of £3.4m, giving it the firepower to make acquisitions in a market which is still highly fragmented.

Also, manufacturing is increasingly being shifted to the Far East, which now accounts for 34 per cent of supplies. But while costs are being lowered, quality is being raised as consumers increasingly seek better finishes such as glitter on cards and gift wrap.

One slight query is the United States, where profits halved after due to currency fluctuations and weakening trade in the independent retail sector. The business now wants to increase its distribution through the main retail chains.

Assuming profits of £12m this year, the shares - down 7.5p at 239p - trade on a forward earnings multiple of 12. Not cheap after a strong run but the shares remain attractive.

Still hidden value in Intercare

A profit warning from Intercare yesterday and another reminder that its drug distribution business is holding back the group as a whole, which is now trying to focus on the business of manufacturing pharmaceuticals.

Although two-thirds of the little group's turnover comes from distribution, this low margin business accounts for less than 40 per cent of profits. Intercare supplies generic drugs (that is, unbranded drugs where patents no longer apply) to pharmacies in the UK. And it dabbles in "parallel importing", taking advantage of free trade laws to buy branded drugs in European Union countries where they are cheapest and ships them into the UK. The business has been hit, Intercare said, by the rising euro (in which it pays for the products) against sterling (in which it sells them).

Parallel importing is a practice that infuriates the giant drug companies, although Intercare insists it has a grown-up relationship with such companies, who are important partners in other areas.

Intercare's manufacturing division is growing at some 10 per cent a year, thanks to contracts to make drugs on behalf of Big Pharma and thanks to its own customised drugs. A share price of 131.5p gives a market value of £109m which means there is hidden value here. Hold.

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