The Investment Column: Dunelm's stores merit a visit, but be wary of the shares

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The Independent Online

Our view: Avoid

Share price: 194.75p (-1.25p)

Dunelm Mills may not be a household name in the south, but the news that the family-owned homewares retailer is listing its shares has got an awful lot of private investors in the Midlands very excited. Today they finally get their chance to snap up some stock.

Since the shares were priced last Thursday at 170p, valuing the group at £340m and netting the husband-and-wife team behind the business a cool £102m, they have jumped higher than a quick-release roller blind. Given that the Adderley family, who started out selling curtains from a market stall in 1979, still own 70 per cent of the retailer, they are sitting pretty.

But should retail investors pile in? Or should they stick to filling their trolleys with the company's cut-price furnishings?

Dunelm Mills is the UK's only out-of-town homewares retailer, operating 65 superstores in its Midlands heartland. It is keen to expand, and expects to open up to eight new stores a year. It operates off very low gross margins, handing savings straight back to its customers, and keeps its costs as low as its prices by getting suppliers to shoulder the burden of store deliveries.

Earnings growth - expected to be in the mid-teens once it has paid back the £50m special dividend the Adderleys have also scooped - will rely entirely on hitting its rollout targets. Which could prove tough if competition for sites pushes up rents.

The shares are cheap, but beg the question of why the family is getting out, especially given they are not raising new capital to fund their expansion. Tight liquidity will probably push the shares up in the coming weeks, but long-term investors should stick to shopping in one of its stores. Avoid.

Hitachi Capital

Our view: Hold

Share price: 248p (+4p)

Vanity, vanity, all is vanity. Those words from the Old Testament seem especially true in today's world. This is not the place to debate whether it is a good or bad thing. But, one thing is for sure, there is a lot of money to be made from human vanity.

Hitachi Capital, the finance group, is one company that looks set to profit from it. It is fast branching out into the business of providing loans to help people pay for cosmetic surgery. A study conducted for the group found that 20 per cent of women interviewed wanted to improve their bodies over their homes and 33 per cent would prefer a new nose over a holiday.

Given this trend, it is of no surprise that a further survey found the cosmetic surgery market has experienced double-digit growth in the past two years and is forecast to grow by 46 per cent between 2004 and 2008. Although globally women are its main customers, in recent years cosmetic surgery has also become popular among men.

Hitachi already offers its "buy now, pay later" finance agreements to 7,000 dental practices in the UK, so providing the same service to plastic surgeons up and down the country is relatively easy for it to do.

Yesterday, the finance group unveiled a solid set of interim results. Its pre-tax profits soared 42 per cent to £7.5m while earnings per share increased 70 per cent to 13.9p, benefiting from the settlement of a prior year tax claim.

Alongside consumer loans, the group also arranges business finance and provides vehicle leasing services. In fact, they account for 75 per cent of its revenues which helps to diversify the risk from a shareholder's point of view. Although the company yesterday reported a rise in arrears, it prides itself on having one of the best records in the sector when it comes to avoiding bad debts. At 9.7 times forward earnings, Hitachi shares are well worth holding on to.

Topps Tiles

Our view: Hold

Share price: 247.5p (-3p)

Topps Tiles' finance director Andrew Liggett announced his decision yesterday to step down from his position at the tiles retailer after 11 years. The 45 year-old will remain at the group for next month's annual results and leave in April. By then, a replacement will have been found.

Mr Liggett is believed to want to spend more time with his family. Understandably, Topps was keen to assure the City that no nasty surprises are on the way. It did so by drawing attention to the solid trading statement it put out earlier this month. Analysts expect the group to unveil a 45 per cent jump in annual profits to £39m on 28 November.

Topps is the UK's largest retailer of ceramic tiles. It is estimated that the group has at least 5 more years of growth in this country until the market is saturated. It then has the option of moving into Europe. Although the stock trades at 17 times earnings, its 4.3 per cent dividend yield and Topps' track record make it worth holding.