Taylor Woodrow's rating looks too high

Enterprise; Affinity Internet
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The Independent Online

When the technology bubble burst, it wasn't just the value of everyone's stock market investments and pension savings that went pop. Spare a thought for the housebuilders of Silicon Valley. Spare a thought, specifically, for Taylor Woodrow, one of the biggest UK-listed housebuilders, whose northern California subsidiary plunged into the red last year. It suddenly found that demand for its luxury homes had shrivelled, and was forced to write off £9m of land investments in the Golden State.

That was the nasty shock in yesterday's results, and a useful reminder that, despite the acquisition of Bryant last year, Taylor Woodrow continues to have significant exposure to the vagaries of the US housing market. Analysts expect little growth across the Atlantic over the coming year or so and, despite a new management in California, the risk of disappointing results remains high.

The UK housing market, of course, continues to defy the gravity of the economic situation. Bryant Homes entered 2002 with an order book of around £180m, up 25 per cent, and a land bank capable of satisfying demand for 3.5 years. The reasons for the strong market have been well rehearsed on the dinner party circuit: historically low interest rates and increasing numbers of single-person households to fuel demand; planning constraints on new developments to dampen supply. Taylor Woodrow, with its expertise in developing "brownfield" sites, run-down industrial sites, for housing, is also likely to be a winner from changing patterns of demand in the medium-term.

For now, though, its US exposure, the winding down of its investment property interests, and low-margin construction business reduce the stock's attractions. On 7 times this year's forecast earnings, the shares trade on a par with the rest of the sector, when they deserve a discount. Avoid.

Enterprise

Enterprise shares have increased fourfold in the past 18 months. Surely those investors not yet on board have missed the boat. Surely those on board must be itching to cash in their profits now. What's to do?

The Lancastrian management have assembled a sturdy business, supplying management services to utilities and local authorities that no longer want to run boring blue-chip activities. Enterprise organises maintenance work, such as repairing pipes for Severn Trent Water, plugging in phone booths for BT, or fixing potholes for Liverpool City Council.

Enterprise characterised 2001 as a transition year. There was little growth at its underlying businesses, although four acquisitions helped sales and pre-tax profits to record levels. Turnover was £127m, profit was £8m. This year should be better. The company reckons it can win additional business from its existing clients, who currently outsource only about 18 per cent of the maintenance work on their networks. Analysts reckon there is scope for 20 per cent annual growth.

Enterprise has cut its debt in the past year, so shareholders need not be tapped for more funds for routine acquistions. That said, the management are starting to talk about finding a "transformative deal" that would give the company a presence in southern England and dramatically increase its size. Such a deal would be worth supporting, particularly if the group moves up from the AIM market to attract extra institutional investor backing.

Unfortunately, the stock is on 21 times the coming year's earnings, which looks high compared to its peers. That might cap the gains to be had in the short term, but long-term growth seems assured. Up 4p to 295p, it is still worth holding.

Affinity Internet

Affinity Internet is not easy to pigeon-hole. It provides internet, mobile phone, telecoms and software services to companies wanting to exploit their brands in new areas.

Its customers range from Arsenal football club to the Open University. Each offers their users an own-brand internet service, but it is Affinity's ISP which is behind the service.

The company is quietly delivering its promises, and is forecast to more than double sales this year. In 2001, it made a pre-tax loss of £30.1m compared with a £26.1m loss a year before. Sales were £52.8m up from £11.3m, driven by strong growth in telecoms. Its £8.5m cash pile should be ample to see it through to profit this year.

Affinity's broker is forecasting it will produce an £8m profit in 2002, making earnings of 18.5p per share. That puts the stock, down 15p to 286p, on a forward earnings multiple of just 15 times. The business model is new and relatively untested, but the growth potential is being overlooked. At these levels, the shares are worth betting on.

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