Take profit from L&G rights issue

Hold on to Mothercare and hope for a bid; MJ Gleeson locked out of the housing boom
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The Independent Online

It's a no-brainer, the Legal & General rights issue. For every 50 shares you own, worth 108.75p each last night, you can buy another 13 for just 60p each, provided you get your cheques in by next Tuesday.

It's a no-brainer, the Legal & General rights issue. For every 50 shares you own, worth 108.75p each last night, you can buy another 13 for just 60p each, provided you get your cheques in by next Tuesday.

Yet again, David Prosser has proved to be ahead of the pack, reeling in £786m from the capital markets while his rivals at Royal &SunAlliance thrash about trying to tie up their own rights issue. L&G's chief executive is well regarded in the City for having pioneered a "pile 'em high, sell 'em cheap" approach to pensions and investment products. He anticipated that the UK Government and regulators would increasingly want to push the kind of simple, low- margin products with which L&G has been able to boost its market share.

The rights issue has been billed as an opportunistic call on shareholders to bolster L&G's reserves and allow it to write new business that its cash-strapped rivals will have to turn down. There are plenty of City sceptics who reckon that L&G, while remaining a million miles from danger levels, also wants to shore up its solvency levels in the face of falling equity markets.

Either way, the success of the rights issue (it is fully underwritten) puts L&G in pole position to capitalise in the medium term as companies force employees into private pension provision and existing pension fund trustees offload future liabilities by purchasing bulk annuities from L&G.

With a 5 per cent dividend yield, L&G shares are a core holding but, unless yesterday's equity market bounce is the start of a sustained rally, shareholders may have to be patient to see capital gains. New business sales growth is slowing sharply now the company is more than a year into its distribution deal with Barclays and investors become disillusioned with the returns from investment products.

Buy the rights, but bank the profits as soon as you can.

Hold on to Mothercare and hope for a bid

Mothercare is a problem child and no mistake. Umpteen profit warnings, never-ending distribution problems, a change of chief executive and continued takeover speculation are just a few of the lowlights of the annus horribilis this company has put its shareholders through. And it is still only October.

Many investors must have given up on the stock by now, deciding to throw the rattle out of the pram in disgust. We have some sympathy. Mothercare is, sadly, one of The Independent's share tips of the year. Not to put too fine a point on it, the stock has halved. So should investors stick with it? It is a difficult call. On the plus side there is a new chief executive, Ben Gordon, who joins from Disney Stores in December. Investors may like to give the new man a chance. Second, there is the faintest glimmer of better news on the trading front, though it really is quite faint.

Yesterday's trading update showed that in the 14 weeks to 12 October underlying sales were down by 1.2 per cent. That is some improvement on the 3.1 per cent fall in the 14 weeks to 12 July. The shares duly ticked up 8.5p to 100.5p.

The downside is that some of the problems to have haunted this company have yet to be fully resolved. The new distribution centres are being put on a more stable footing though costs are still too high. The warm autumn weather has also caused slower sales of clothing. The biggest worry is increasing competition from the likes of Asda.

Analysts forecast a full-year loss of £6m with a return to the black in 2004. Mothercare remains a strong brand but its smaller, high street stores need a makeover. A bid is a possibility and the shares are worth holding to see if this troubled toddler can finally learn to walk.

MJ Gleeson locked out of the housing boom

Even with the housing market booming, it is possible to make a dog's dinner of a housebuilding business. MJ Gleeson, the construction group, saw profits from its Gleeson Homes division all but wiped out in the past 12 months after cost overruns and the decision to abandon or delay several big projects. The worst may well be over, as was claimed yesterday, but the new management at the division still has plenty to prove.

It took what shine there was off the rest of the group's results, which did include a strong performance from the core contracting business, which includes a smattering of private finance initiative work and saw a 28 per cent increase in profits. Even here things should have been better. A £32m project to build a cement works in Buxton, Derbyshire, generated serious losses.

Dermot Gleeson, the chairman, could offer no words of comfort for the future either. Profits, which were down 20 per cent at £15.1m, will be barely higher in the coming year. Water companies have delayed infrastructure projects, he said. The commercial property market is softening, he said. Insurance costs have soared, he said. So down come forecasts again. At 930p and on a price-earnings multiple of nine, MJ Gleeson shares are to be avoided.

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