Wolseley risks are built into price

JJB on the mend after annus horribilis; London Scottish Bank is not one to collect
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The Independent Online

There has been a little bit of a trade skirmish between the US and Canada, and the fallout is going to be seen in Wolseley's profit figures in the spring. The US accused Canada of subsidising its timber industry, and has slapped import tariffs on the product. A rush by Canadian companies to send lumber over the border before the tax was imposed has led to a glut of the stuff that has depressed lumber prices. And, since Wolseley's North American building products business is one of the continent's biggest distributors of lumber, turnover and profits have taken a big hit.

There has been a little bit of a trade skirmish between the US and Canada, and the fallout is going to be seen in Wolseley's profit figures in the spring. The US accused Canada of subsidising its timber industry, and has slapped import tariffs on the product. A rush by Canadian companies to send lumber over the border before the tax was imposed has led to a glut of the stuff that has depressed lumber prices. And, since Wolseley's North American building products business is one of the continent's biggest distributors of lumber, turnover and profits have taken a big hit.

The City was reminded of this fact again in a trading statement yesterday, which also said the 8 per cent slide in the dollar will also depress interim profits, to be reported in sterling in March.

The wasn't any mention of the other big negative: asbestos. As a distributor of building products rather than a manufacturer, Wolseley is at less risk than many from US claims for damages resulting from asbestosis. Its legal cases are in the hundreds rather than thousands, and the company insists it has insurance cover many times greater than its liabilities. Analysts prefer to reserve judgment and Wolseley doesn't do itself any favours by refusing to publish exact figures. Investors need to be aware of the risk.

The US housebuilding market has stayed robust, so its plumbing and building materials businesses have been able to make up there what has been lost on commercial building work during the economic downturn. The UK, too, has held up well, but European markets continue to be poor. With the dire outlook for the European economy and the froth likely to come off the housing markets on both sides of the Atlantic, there are more negatives than positives in the short term.

So Wolseley shares are no screaming buy. But their valuation does reflect the risks and after their slide from 750p last May to 484.5p yesterday, investors may have missed their chance to take profits. With a dividend of 4 per cent and with most valuation measures showing the stock in line or at a modest premium to its peers, it is a solid hold.

JJB on the mend after annus horribilis

Dave Whelan has lost the City's trust. The former professional footballer and founder of JJB Sports has lost a paper fortune in the past year as his sports clothing retailer's shares have collapsed. He has diversified the group into discount stores through the acquisition of TJ Hughes – a move which left investors baffled and worried the company has lost its way. And the company has lost market share as the competitive threat from Asda intensifies. Can Mr Whelan regain his magic touch?

With a devastating profit warning and the suicide of its chief executive, last year was a horror for JJB, and 2003 has got off to no better a start. Trading in the six weeks over Christmas saw like-for-like sales rise only 0.5 per cent and, in order to generate even that increase, JJB was forced to slash prices. The problem is shoppers are no longer willing to pay up for branded sports goods, when the local Asda is selling perfectly good gear at a fraction of the price. JJB thinks it is having some joy in persuading Nike et al to lower wholesale prices, and these disappointing Christmas sales figures may well help them in their campaign.

Meanwhile, JJB's flight out of town continues. Its move to giant superstores has allowed it to generate economies of scale, and at eight Northern sites it has installed health clubs. These have almost 30,000 members in total and are showing no sign of succumbing to the malaise at the luxury end of the fitness market. Eight more are planned for this year.

The TJ Hughes acquisition didn't make any sense, but that doesn't mean it won't make any money. There are good returns to be made simply by introducing better IT systems and cutting down on theft. The £42m price tag does not leave JJB at all financially stretched.

JJB shares fell 6.5p to 141p to trade on a price-earnings multiple of less than 6. That more than accounts for a consumer slowdown and the likelihood it will miss even this year's lowered profit forecasts; it prices in meltdown. Farsighted investors should buy.

London Scottish Bank is not one to collect

The prospect of sluggish economic growth is not a cause for long faces at London Scottish Bank. It cheerfully says it makes nearly a third of its money from collecting debt, a service companies are particularly keen to take up when recession strikes.

The business is not a bank at all but a lender to the "sub-prime" market (that's people deemed too much of a credit risk for the high street banks). It demonstrates that the sector remains one of the most profitable areas of financial services: pre-tax profit rose 12 per cent rise in the year to 31 October to £17m.

But as a business which makes more than 90 per cent of its profits from the UK consumer, the outlook is by no means cloud-free. If consumers start rebuilding their finances rather than carry on spending, then many will no longer require London Scottish's services. A rise in bad debts is also a serious risk. These fell slightly as a percentage of total loans last year, but that would be likely to change if the economy comes under further strain and its debtors move to lower paid jobs or become unemployed.

The era of fat profits in the sub-prime sector also appears to be ending. London Scottish's margins are being squeezed in some areas: more high street banks are shouldering their way into the market by setting up sub-prime divisions.

Old Mutual Securities predicts pre-tax profit of £19m for 2003, putting London Scottish shares, which dipped 0.5p to 115.5p, on a forward price-earnings ratio of 11. That is too expensive at a time when the risks are expanding faster than its growth prospects. Avoid.

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