Worth banking on Lloyds TSB

There's value at De La Rue; Fashionable Peacock can fly to new heights
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The Independent Online

When Peter Ellwood, chief executive of Lloyds TSB, turns the lights out for the last time tomorrow, after six years at the helm of the UK's largest retail bank, it will be with great interest that the City watches the man who switches them back on again on Monday morning.

Eric Daniels, the man moving into Mr Ellwood's airy, modern office looking out on to the City, is no stranger to the lender. He has run Lloyds' core retail banking arm since 2001, but his message in the past few months has been that he has a few new ideas up his sleeve to get Lloyds' black stallion galloping again.

The past three years have been tough for Lloyds, particularly as its Scottish Widows life insurance arm has been mauled by the bear market.

Ground work for a resurgence in profits and sales has already been laid. Lloyds has 15 million customers - making it the biggest of the Big Four high street banks - and sells more products per customer than its rivals. It has reduced its exposure to risky overseas investments such as in Latin America and its cost base is one of the lowest in the sector.

Mr Daniels plans to return to old-fashioned notions such as offering tip-top service as a way of encouraging individuals to buy more products through Lloyds and also to protect its customer base from marauding smaller rivals who are better able to compete on price.

There have long been fears of a dividend cut to help shore up the finances of the Scottish Widows side, but with the stock market looking firmer this seems to have diminished as a prospect.

Lloyds now looks as if it will maintain or increase its 34.2p payout over the next couple of years at least, making its yield one of the highest among banking sector shares. Yesterday's speculation that the company is preparing to sell off its New Zealand assets for £2.4bn also highlights the likelihood that the bank would choose other ways to raise cash before taking the unpopular step of slashing the dividend.


There's value at De La Rue

For a company with a licence to print money, De La Rue has been a gallingly poor investment over the past few years. The group, whose main business is the printing of banknotes, has seen its shares more than halve in value, from a crisp fiver at their peak to just a pocketful of change.

A lot of things have gone wrong all at once. A big customer for its banknote paper cancelled orders just as the new euro printing contracts dried up, putting pressure on the core business. Sales of cash machines and other sorting equipment have slumped due to the difficult economies in Germany and Spain (where banks have been hit by financial crises in Latin America). And the market for security printing - which includes the production of stamps, tax disks and the like - is also weak.

Indeed, so many of De La Rue's businesses are looking ropey that a new managing director is considering selling or closing a number of them. The results of this review are not due until November, but there are reasons investors may want to get in early.

Chief among these is that things don't look like they are getting any worse. Yesterday's results showed De La Rue slipped to a £4.7m loss for the year to March from a £100.9m profit the year before, but they also showed the company is generating strong cashflows, which means there is certainly a solid business struggling to get out. Profitability will be improved by the job cuts and factory closures that have already been implemented.

De La Rue may not quite be at the bottom in terms of demand for its various products, particularly if the European economy does slide further, and the weakness of the dollar is also having a negative impact. But it has no debt, and shareholders benefit from the strong cashflows through a chunky dividend (which, at a share price of 234.5p, gives a yield of 6 per cent) and through the ongoing share buy-back programme, which should bolster earnings per share.

De La Rue topped a recent chart of companies likely to prove attractive to private equity bidders compiled by Morgan Stanley. Although venture capitalists don't usually want to bother with the restructuring that is still necessary at this company, there is value here. It is risky, but investors may want to bet it can be unlocked.

Fashionable Peacock can fly to new heights

Peacock has been flying in recent months. Its shares are up 85 per cent since we said they were worth a punt last September, as the discount retailer has spruced up its own stores and improved profits at the bonmarché chain it bought last summer.

The 370-strong Peacock's chain is trying to shed the down-at-heel image that has hampered progress since the company floated in 1999. It is a year into a four-year programme of store refits that will modernise the stores and has already made sure it is offering the trendiest clothes it can get for sale within its budget prices. We used to be a season behind, says Richard Kirk, chief executive, but now we need to be no more than five or six weeks behind the rest of the high street.

The bonmarché business is already benefiting from better application of retail basics like stock control, minimising the amount of clearance sales needed. The 270-strong chain is differentiated from the rest of Peacock in being aimed at the over-55s market, but even here the group is having to keep up with changing lifestyle by introducing racier, lacier nightwear and the latest fashionable clothing.

Sales growth is strong as a result of all these improvements and the share price, which fell a ha'penny to 131p yesterday as investors cashed in recent profits, has higher to soar.