The Investment Column: Bovis is worth holding after a solid set of results

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The Independent Online

Our view: Hold

Current price: 736p (-7p)

Running a publicly quoted house builder must be a bit depressing – no matter how buoyant market conditions get; no matter how much consolidation goes on and no matter how often forecasts are met, the market continues to value the sector at multiples that assume disaster is never far away. Rather than paying a premium for predictability, the market seems happier to pay a premium for speculation.

First-half results from Bovis Homes yesterday were once again at the top end of forecasts, with pre-tax profits coming in 10 per cent better than in the corresponding period of 2006 at £58.4m, on the back of a 3.8 per cent jump in revenue to £259.9m. Volume of home sales for the first six months was marginally lower, offset by a higher average sale price.

That said, even in a sector that is not exactly exciting, Bovis does not have the right exposure to set the pulse racing. It does not operate in London or the South East, where house price inflation has been highest, and although it does build luxury homes it concentrates its business in the smaller, starter-home market. Its average selling price rose, but at £189,600 it is the lower end of the market that is potentially most at threat from higher interest rates and the credit crunch fallout.

Although this is another solid set of results it is difficult to get too excited about Bovis.

The shares are supported by a 5.4 per cent dividend yield and for low risk income-seekers the stock looks well worth backing. But it looks like the sector consolidation could take a breather and even if the 8.4 times forecast 2008 earnings Bovis trades at looks good value, the chances of the market re-rating the stock any time soon look slim.

For investors already in the stock the shares are worth hanging on to. The balance sheet is very solid with £108m of cash and almost no debt, but at this stage in the cycle there look to be few catalysts to boost the shares. Hold.

Tullett Prebon

Our view: Buy

Current price: 393.75p (-21.25p)

When the stock markets correct there is a tendency to throw the baby out with the bathwater, and this summer has been no different. The correction caused by woes in the credit markets has been a boon for inter-dealer brokers like Tullett Prebon, and the phones have been ringing off the hook – as proved by record trading volumes in June, July and August.

Tullett was spun out of broker Collins Stewart last December and despite what has been an excellent few months the shares have lost more than 30 per cent of their value between May and the end of August. Inter-dealer brokers provide liquidity in the capital markets by matching up buyers and sellers of a myriad of financial instruments while at the same time providing counterparties with anonymity.

First-half numbers made decent reading – on a constant currency, revenues were up 12 per cent at £371.6m, delivering an 8 per cent increase in operating profit to £64.8m. Pre-tax profits were 16 per cent lower due to ongoing investment in the business, particularly in increasing its electronic broking capabilities.

The greatest threat to its business would be a prolonged period of tranquillity in the financial markets, and even if the current crisis may have subsided, the chances are that global markets will remain volatile for the foreseeable future.

Tullett shares trade on an undemanding forward multiple of 12.5 times forecast 2008 earnings, a significant discount to its nearest UK peer, ICAP. Operating margins of about 18 per cent should be maintainable and with greater investment in its electronic brokerage there is even scope for margins to improve. This is a quality business and a good hedge against weaker markets – which every portfolio should have. Buy.

Haike Chemicals

Our view: Risky buy

Current price: 135.5p (-4.5p)

The risks of investing in Chinese stocks cannot be overestimated – one glance at the performance of Chinese stocks on Aim so far this year should be enough to scare off most investors. But yesterday's results from Haike Chemicals are worth a second glance despite the shares falling 35 per cent since May.

Haike is a speciality chemicals and petrochemicals groups based in Shandong province in northern China.

It listed on Aim in February and debut interim results were in line with forecasts, with pre-tax profits hitting $10.2m, up a staggering 410 per cent, on revenues of $171.4m, a mere 85 per cent improvement.

The company makes light fuel oil, chemical light oil and liquefied gas for sale within the Chinese market. The Chinese government strictly controls the price of all petrochemical products, including gasoline and diesel, but those controls are due to end before 2008, meaning Haike's profits should break out to the upside. The controls have made it hard for Haike to pass rising crude prices on to customers, leading to pressure on margins in the first half.

House broker Hanson Westinghouse believes that Haike is on course to deliver full-year results of $17.5m of pre-tax profit, generating 15.1p of per share earnings. That puts the stock on a multiple of just 8.8 times, falling to under five times forecast 2008 earnings.

It is worth repeating the risk involved here. This stock is only for investors who can afford to take huge risk with their money – but if Haike gets the rub of the green and hits its full-year forecasts the shares will begin to look ludicrously cheap. A very risky buy.

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