WH Smith is looking overvalued

Wolfson makes chips appetising; Mouchel on the road to £700m order book
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The Independent Online

Poor old WH Smith must be turning in his grave. First his village, Hambledon, was put up for sale because his heir Henry thought it wasn't worth the hassle, and now his stationery empire is in trouble.

Yesterday's headline news from the eponymous magazines-to-DVDs group made glum reading. Its core UK retail division has spent the year struggling to fight off competition from the supermarkets, with profits and sales suffering.

Sales across the group's 677 UK stores have remained flat since the start of its current financial year and Kate Swann - who becomes chief executive when Richard Handover, er, hands over next month - will have to resort to some heavy discounting if the sales line is to grow. Mr Handover yesterday barely bothered to put on a brave face on the eve of the crucial Christmas period, warning that the festive season would not be particularly merry for retailers.

In anticipation, ABN Amro cut its underlying 2004 profit forecasts yesterday to £114m from £124m. But with three-quarters of the retail division's business riding on how many gifts, books and games it sells from 1 November to the middle of January, not to mention almost all of its profits, there is every chance that these numbers will fall again.

Pre-tax profit last year was as poor as expected after an August warning alerted the City to the problems the group was having selling CDs. Even excluding exceptionals and goodwill, it fell 13 per cent. This number looked uglier still after a £35m write-down of its US assets, a £12m provision against surplus property and an £11m contribution to its pension fund, leaving a bottom line profit of £52m, down 38 per cent. Even the disposal of its US airport and hotel businesses has a sting in the tail, in that losses are still being incurred until the sale is finalised.

Luckily the group's publishing and news distribution arms are on track, but this could be little comfort if Ms Swann fails to prove the core stationery estate is not obsolete in today's computer-obsessed world.

The shares look overvalued despite a stocky 5 per cent yield. Avoid.

Wolfson makes chips appetising

Investors who tired of chips with everything in 2000 have built up quite an appetite during the famine in tech stocks since then.

Wolfson Microelectronics, the chip designer spun out of research at Edinburgh University 20 years ago, seems to have been on everyone's menu as its £260m flotation was well oversubscribed.

There is much to recommend this young company with excellent prospects. Among tech stocks, semiconductor companies were first to bomb and are expected to be the first to recover. Wolfson has real products, real sales and real profits. Its technology is used in a range of consumer electronics, most notably digital cameras and DVDs where there is enormous scope for growth. Other uses are in mobile phones, a recovering sector, and games consoles. The early signs are promising: the shares were placed at 210p and quickly changed hands at up to 275p before the start of official trading on Tuesday.

The problem for investors is in valuing a company that is rapidly growing sales and profits but does not propose to pay a dividend yet. The valuation put on the float seems to owe more to what the market would stand rather than any sophisticated calculation.

Sales doubled from $16.2m to $33.7m last year. This year they hit $29.3m in the first half alone. The 2003 first-half, pre-tax profit of $4.2m beat the $3.6m earned in the whole of 2002. If the full year hits $10m, that would give earnings per share of 6.8 cents (4p).

Wolfson shares are likely to be highly volatile in their early weeks, but this is a company whose products are good and likely to stay in demand. Worth the gamble.

Mouchel on the road to £700m order book

Cazenove, the broker to Mouchel Parkman, managed to find a home for 7.75 million shares in the road and rail maintenance group yesterday, as pre-float investors in Mouchel cashed in after a stellar performance for the company's shares that has only been accelerated by the merger, in August, with its smaller rival Parkman.

The combined group has growing positions in the expanding market for outsourced maintenance contracts from the public sector and utilities. In rail, it is doing new supervisory work for Network Rail, which ought not be as badly squeezed on price as the more blue-collar track repair work, which is the source of so much current controversy. The privatised London Underground ought also to be offering new work, particularly in signalling, Mouchel's area of expertise.

In water, the regulator warned only yesterday that bills will rise to pay for infrastructure upgrades that Mouchel is well placed to help plan. And in roads, it is a case of jams today meaning jam tomorrow for Mouchel, as it wins extra project work to design traffic improvement schemes.

Its core work comes through outsourced maintenance contracts and the Highways Agency and others find it convenient and cheaper to put out more work to fewer companies for longer periods. Mouchel's recent wins take its forward order book to £700m-plus, close to three years' worth of revenue. There ought to be scope to grow a dividend, too, now the group is generating real cash.

At 203.5p, the stock is a buy.

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