Swallow profits and sell high-flyer Michael Page
Headlam's magic carpet ride; Minorplanet is one to track for now
Tuesday 19 August 2003
That cliché about one swallow not making a summer was being repeated a lot yesterday by Terry Benson, the chief executive of the recruitment group Michael Page International. Investors, though, are excitable ornithologists and have a particularly keen interest in taking the UK's economic temperature. And so it was that, after one quarter's strong results, Michael Page's overheated shares soared another 9 per cent in anticipation of a rebound in the UK recruitment market.
So what about this swallow? Trading in May and June was stronger than anticipated, the group said yesterday, which meant that its first-half profit before tax was £11.6m, down 36 per cent on last year but better than the City had been forecasting. The outperformance appears to have been in the sales and marketing sector of Michael Page's UK business.
And the chances of summer? Crucially, it is the UK consumer-focused sectors that were unexpectedly up, not the geographies and sectors most affected by the downturn, not the City, not the professional services such as management consultancy or accountancy which could send Michael Page profits surging. Confidence appears to be hardening across the world, but there have been false dawns before and it will be the autumn before we can be really sure. This time last year, too, Michael Page was being relatively upbeat. This year, employment costs have been jacked up by the UK's national insurance rises, and shareholders still appear more interested in having their companies maximise profits than investing in expansion.
Michael Page's shares were floated at 175p in 2001, just after the peak of the dot.com bubble in the finance industry. The group will not easily make that year's £62m profit again. It has strong positions around the globe and ambitions in the US. Its placement services may again become indispensable since it is true - if unpalatable - that the world does not have enough management consultants to go round. But with shares already back up to 160.5p, on 40-odd times this year's earnings and even 27 times its bubble-time peak earnings, the shares are simply too expensive. Sell.
Headlam's magic carpet ride
Headlam, a distributor of carpets and other floor coverings, posted a strong set of interim results yesterday, matching its house broker's forecasts. The figures were "in lino" with expectations, you might say.
Headlam is the middle man between the carpet manufacturers and the small independent retailers who do plucky battle against the might of Allied Carpets and Carpetright. The continuing strength of UK consumer confidence and the housing market has meant redecorating continues apace and Headlam was able to boast a 10 per cent rise in turnover, to £194.2m, for the six months to 30 June, and a 9 per cent rise in pre-tax profit, to £13.9m.
The improvement in operating profit margins was a particular highlight of the figures, showing that Headlam's 42 businesses have benefited from the expenditure on expanded warehouse facilities which form the backbone of the group. Further warehouse extentions or openings are being planned. The group has a cash cushion of £10.8m to support the ongoing capital expenditure.
There was also better news from Continental Europe where Headlam operates in France, the Netherlands and Switzerland. The economic situation is not so favourable and operating profit slipped by a third, but turnover was still growing and the long-term opportunities remain strong. Distribution to small retailers on the continent is as fragmented as it had been in the UK when Headlam began its acquisition spree a decade ago.
Headlam may find itself floored by a consumer downturn in the short term. But it is a strong performer and, up 9.5p at 317p, the shares yield a 4 per cent dividend. Hold.
Minorplanet is one to track for now
Minorplanet systems has gone from a standing start six years ago to one of the UK's leading telematics companies, whose technology is sold to more than 6,000 customers who use it to track their fleet of company cars, vans and lorries. Useful software already, preventing employees wandering off the job and improving fuel efficiency, among other things. The company is being backed by General Electric, which owns 20 per cent. Longer term, its sytems might allow the electronic road charging that the Government is edging towards supporting.
Right now, sadly, Minorplanet has made a bit of a dog's dinner of its finances. It bought a big stake in a US company as a means of distributing its product overseas, but is now giving most of that stake away in order to staunch the losses. It is handing 42.1 per cent of Minorplanet USA to an unnamed third party, and there will have to be a big write-off in final results later this year. There are also big restructuring charges to come, as the new chief executive, Rob Kelly, slims down the UK and European business. He promises that the company - which still has a nest egg of £4.8m in the bank - will be cash positive next year, but it is not clear yet how he will revitalise sales growth, which has slowed to just 5 per cent according the third quarter figures yesterday.
As the company works through new accounting policies and puzzles over its future direction, there is no hurry to buy, although investors should track its progress. Existing shareholders should hang on for the ride.
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