Safeway worth a try while Hewitt considers bid war

Wait for more at Morgan Sindall; NWF is still cheap despite stellar run

Most people feel like booking another holiday on returning to work after a summer vacation. Patricia Hewitt, for one, will need another holiday once she has digested the Competition Commission report on the bid battle for Safeway which will greet her return.

Trolleyloads of papers will be dumped on her desk this morning, outlining the commission's verdict on whether the Secretary of State for Trade and Industry should allow Safeway to be swallowed by one of its rivals - or not.

The UK's number four supermarket chain has topped the shopping lists of William Morrison, Tesco, J Sainsbury, Asda and the Bhs owner Philip Green. Bradford-based Morrison's sparked the multi-billion pound takeover frenzy in January by proposing to merge with Safeway in an all-share deal then worth £2.7bn.

But should investors join in the excitement of Britain's biggest supermarket sweep since the mighty Wal-Mart chewed up Asda? Should you stockpile some Safeway shares before Ms Hewitt's judgement next month?

In trading terms, the picture at Safeway is not good. The group has lost market share to all its predators, and its most recent quarterly sales showed a 0.6 per cent decline.

More relevant is how badly the stock will react if Ms Hewitt takes a dim view of further consolidation. The worst scenario for shareholders would be a blanket ban on all bids - likely to send Safeway shares down to about 200p on trading grounds alone. Happily this is unlikely to happen: the commission said a Morrison acquisition would be "pro-competitive" in its June remedies letter. Morrison shares represent good long-term value in themselves.

Clearance for Morrison alone, whose bid is currently worth just under 250p per share, would preclude a bidding war among trade buyers but analysts predict the presence of Mr Green and any number of deal-hungry private-equity houses would limit the stock's downside to 230p to 240p. After all, Safeway has a net asset value of 400p a share.

Best of all would be the green light for Asda and Sainsbury's alongside Morrison (no one seriously thinks Tesco has a chance). Although the number two and three operators would have to sell a significant chunk of Safeway's 481 stores, their presence could boost the take-out price as high as 390p per share. While it is obviously risky to try to play these situations, speculative investors could well find Safeway a lucrative punt. Buy.

Wait for more at Morgan Sindall

As with the UK economy as whole, so with Morgan Sindall. The great spending splurge by the public sector is holding things together while conditions are miserable among private-sector customers. So the construction group was able to post a strong set of results yesterday and to reveal a £1.4bn order book of which public-sector work forms the backbone. Affordable housing projects, hospital construction work and rail and road-building schemes are all helping to lift the numbers.

And to lift the spirits, since Morgan Sindall disappointed shareholders mightily last year after messing up the integration of the six regional construction businesses which made up its Bluestone division. That division was back in profit in the six months to 30 June, converting a £4m loss in the period last year into a £179,000 gain. There is still more to go for, particularly now that Bluestone is concentrating on fewer, longer contracts, in particular for the National Health Service.

There was strong growth from the infrastructure services division, which has been tunnelling at Heathrow Terminal 5. Water companies are also increasingly outsourcing big infrastructure projects. The main worry is falling turnover in the office refits division.

The order book for affordable housing suggests that this division will be the most significant driver of profit growth in the medium term, and Morgan Sindall is investing here and has the capacity to take on extra debt in order to do so. Despite a cash outflow, the company was still able to increase its interim dividend although the dividend yield this year is likely to be just 2.5 per cent at last night's closing share price of 332.5p. On Arbuthnot's forecasts, the stock is on a current-year price-earnings multiple of 8.5, falling below 7 next year. Hold.

NWF is still cheap despite stellar run

NWF is "a four-legged animal", says its chief executive, Graham Scott, and walks perfectly well even if one of its legs has a bit of a limp. He can be forgiven the bestial metaphor, since the group was formed in 1871 as a farmers' co-operative and hundreds of the UK's dairy farmers are customers of its animal feed business, one of the four legs.

The Cheshire-based conglomerate also distributes fuel on behalf of Texaco, warehouses and transports groceries to supermarkets, and owns three garden centres.

It may look a peculiar beast, but it is a hard worker for its shareholders, more than a quarter of whom are still farmers. All the businesses are running at or close to full capacity. The warehousing business has had to rent extra space while a new building comes on stream. NWF is looking to hook up more independent garages to its fuel distribution unit, while there should also be growth at the garden centres where extension plans are in train. So Mr Scott is a cautious man, not betting the farm on expansion, and debt levels and interest payments are manageable as a result. There is also a well covered dividend yielding 4 per cent at the current share price of 375p.

The 12 months to May saw a 20 per cent leap in profits to £5.05m, but there may be no growth at all in the coming year as a result of higher pension and national insurance costs. NWF will struggle to maintain the stellar performance of its shares, but the stock is on a multiple of less than 9 times earnings, which is cheap for a company that has such a strong record and whose businesses are continuing to win market share.