The Investment Column: Cash in while Kier Group rides the housing dip

Click to follow
The Independent Online

Our view: Take profits

Current price: 2,113p

In comparison to many of its peers, Kier Group's shares have held up well in the last three months – even if they are down just under 17 per cent from the peak. Anyone buying into the stock two years ago is still sitting pretty on almost double their money.

Yesterday's first-quarter trading update was enough to encourage more buyers into the stock, even if the company does not expect anything better than in-line, full-year numbers. But in this market, particularly given the weakness in construction and the house building sector, that is still a good performance.

Kier is unique in the UK as both a heavy construction group and a house builder. Although it only began private residential construction in 1998, the division now generates more than half of all group earnings. But, despite a solid order book 4 per cent ahead of the same period last year, the company only described the division's performance as "satisfactory" and said that its sites have experienced a "notable reduction in the level of visitors" on the back of the collapse of Northern Rock.

Elsewhere, the business looks to be in good shape. The construction division enjoyed a record first quarter, while in building maintenance the company has won preferred bidder status in a £400m contract to maintain and repair Stoke-On-Trent's 20,000 council homes. Several other contracts, although much smaller, were also won in the first quarter.

Despite this solid trading statement, investors should be concerned about the housing market. Kier's statement regarding its housing division sounded rather more hopeful than certain, and the anecdotal evidence is that the housing market is slowing down far quicker than the industry would have investors believe. At this stage, having enjoyed such a strong run, investors with a tidy profit should err on the side of caution and, following yesterday's strong gains, bank some of it.

Lok'* Store

Our view: Buy

Current price: 200p

Valuing Lok'* Store Group, the Aim-listed operator of self-storage warehouses, depends on what you think it is. As a stand-alone self-storage business, it is very expensive, trading on more than 100 times forecast 2008 earnings. As a property company, it is incredibly cheap, trading on a 40 per cent discount to its Net Asset Value and at a bargain basement price in comparison to its peers.

Despite the valuation, yesterday's full-year results were encouraging. Pre-tax profits, not including the exceptional gains from the sale of two sites, came in at £580,000, up from a small loss last year, on the back of a 19.2 per cent jump in turnover to £10.67m.

Operating profit rose 124.6 per cent to £1.55m and the company announced a maiden dividend, and even though the dividend of 0.67p is nothing to get excited about, it is a step in the right direction and a sign of a maturing business.

The numbers themselves are fairly insignificant – it is the value of Lok's property portfolio that is the real driver of the shares. For the full year, the NAV rose 24.8 per cent to 270p and more than 60 per cent of its property is freehold.

While the self-storage business is growing fast, Lok has developed a strong portfolio that should continue to deliver profits, and with the majority of its customers coming from the commercial sector its earnings look relatively secure.

Its major listed competitors, Safestore and Big Yellow, both trade at a premium to their NAV and at a substantial premium to Lok in terms of enterprise value per square foot.

Even if the commercial property cycle looks to be reaching its peak, a significant downturn in the South East of the UK, where Lok exclusively operates, is unlikely. With its strong balance sheet, low debt and expansion plans, a slowdown in commercial property valuations should in fact be taken as an opportunity for Lok. Buy.

Aricom

Our view: Risky buy

Current price: 77.5p

Aricom, the mining group spun out of Peter Hambro Mining in December 2003, moved from Aim to the full market yesterday and for canny investors prepared to take a high-risk bet the stock looks attractive.

Aricom operates five sites in the Far East of Russia and China, mining iron ore and ilmenite for the Chinese market. Iron ore is familiar enough, but ilmenite is essentially a crystallised titanium ore used in the production of steel. Combined, the company has more than 1.2 billion tonnes of reserves.

The balance sheet looks strong, mainly thanks to a fund raising in June – the largest ever completed by an Aim-listed company. Aricom banked $532m net of costs and most of the cash is still on the books.

The move to the main board should see the company move into the FTSE250 at the next reshuffle – a strong buy sign as very few tracker funds will have any weighting in the stock. Although Aricom production is not due to start until December, house broker JP Morgan Cazenove believes that the company could be delivering annual pre-tax earnings of $1bn (£484m) by 2012, up from an expected $40m this year.

Aricom looks to have some world-class assets, experienced management and enough cash to see it through to production at all of its projects.

To raise that kind of money before production has even begun shows that the City believes the story – and for high risk investors the move up to the full market looks like a suitable time to tuck some away.

Comments