Time to stop building up Wolseley

John David Group earns a red card; London Scottish too costly to bank on
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The Independent Online

Wolseley complains that it is the biggest company that nobody has heard of. That's a shame, because those ignorant of this distributor of plumbing, heating and building materials, have missed out on a great success story.

Wolseley complains that it is the biggest company that nobody has heard of. That's a shame, because those ignorant of this distributor of plumbing, heating and building materials, have missed out on a great success story.

The group's trading update, on the first five months of the financial year, provided more good news, with the shares closing up 6 per cent.

The company said profits, on a constant current basis, were up by 27 per cent for the period.

Continental Europe remains largely flat for Wolseley, as a result of the region's sluggish economy. The US and the UK are doing much better economically and Wolseley is also outperforming these markets.

The company's fortunes are tied to housebuilding, repair and other construction projects that are tied to the general state of an economy and the level of government spending. The US position is improving, while the UK is steadily positive.

Many worry about Wolseley's exposure to the dollar. In the first five months, this decreased trading profit by £2.9m. But this is only a theoretical impact, as the company does not repatriate US earnings. Also in the US, an improvement in lumber prices was seen, after the product had suffered from three years of price deflation.

Wolseley is the world's biggest supplier of plumbing and heating equipment. Its geographical spread, with 80 per cent of sales outside the UK, means that it spreads risk. Dollar weakness is a negative but the recovering US economy is generally a good one to be exposed to right now. The prospects for the second half look promising. The company's record on cost-cutting and margin improvement is good. The only trouble is that the shares have performed very strongly over the past few months.

As a builders' merchant, Wolseley gains from home repair and improvement work, which is pretty much a constant, and it does not have to rely on "new build" to drive demand for its products.

The stock closed at 787p yesterday, putting it in a forward multiple of 12.

That's a premium to the building sector, even though the company argues that it has no real UK-listed peers, so that seems high enough.

John David Group earns a red card

John David Group, the JD Sports retailer, failed to score with the City yesterday after its trading statement showed that weak pre-Christmas trading had hit its margins.

Although the company said sales had risen by 2.1 per cent in total, and 3.7 per cent on a like-for-like basis, weak footfall in the run up to Christmas hit profits and resulted in a gross margin of just 0.6 per cent, failing to meet the company's expectations. The shares fell 2.9 per cent to 167.5p.

The company gave a detailed breakdown of what it described as three distinct phases in the period covered by the trading statement - the eight weeks to 3 January.

A strong performance in November was at least partially attributable to the Muslim festival of Eid occurring during that month rather that in December as it did in 2002.

A disappointing three weeks in December followed.

Finally, the company reported a strong final few days just before Christmas, followed by a very strong sale period starting on Boxing Day.

The company also announced yesterday that John Wardle and David Makin, the co-founders of the business, are to relinquish their executive roles.

The 2003 results are now expected to come in at the bottom end of market forecasts.

Numis reckoned pre-tax profit before tax could come in as low as £6m compared with the previous consensus of £8.6m. Given the difficult retail trading conditions in general, the John David Group will struggle to turn the business around.

The shares trade on a price earnings ratio of 17, which is quite enough. Sell.

London Scottish too costly to bank on

London Scottish Bank is not a bank at all, but a lender to what is delicately known as the "sub-prime" market - people who many mainstream lenders would turn their noses up at.

Unlike many of the questionable players in this arena, London Scottish operates well within the realms of what the Government deems to be acceptable terms for individuals who might otherwise find it very difficult to access credit.

That is good news given the Government is planning a crackdown on extortionate lending. But the horizon is not completely free. Interest rates have risen once and may well do so again. While the average size of a London Scottish loan is a modest £3,000, the debt is likely to come on top of other money its customers are repaying.

London Scottish is moving away from door-to-door debt collections towards lending money through branches to customers who repay the cash by standing order. This group is more reliable, but London Scottish still has a large number of traditional customers on its books, and last year increased bad debt provisions by more than loans it agreed.

The company is doing good business, with pre-tax profits up 15 per cent to £19.8m in the year to 31 October. London Scottish shares, at 126p, are on a forward rating of 11. That is too expensive at a time when the risks appear to be expanding faster than its growth prospects. Avoid.

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