Yell - nothing to shout about yet

Wait for Bovis's future developments; Inventive? Vodka bar chain will need to be
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The Independent Online

Investors in Yell, the Yellow Pages directories group, were shouting from the rooftops after the shares jumped nearly 4 per cent, making it the second best performer in the FTSE 100.

Investors in Yell, the Yellow Pages directories group, were shouting from the rooftops after the shares jumped nearly 4 per cent, making it the second best performer in the FTSE 100.

The rise was a collective sigh of relief that stock still belonging to Yell's private equity backers, Apax Partners and Hick, Muse Tate & Furst, had been placed successfully on Tuesday evening.

The expectation of Hicks, Muse and Apax selling out of the business, which they floated in July, had started to weigh on the price. In the event, the 230 million shares were safely placed with institutions by brokers Goldman Sachs and Merrill Lynch. The stock overhang issue has lifted.

Some of the 12.5p rise yesterday will have been down to index trackers adjusting their weightings but it also suggests something more exciting going on. However, there are grounds for caution. In the UK, its Yellow Pages business, with an 80 per cent market share, faces a tough regulatory environment. The DTI has slapped a pricing formula on what the company can charge advertisers. This translated into a 4.7 per cent reduction in rates when the company reported in November.

About 48 per cent of group revenues and 34 per cent of operating profits now come from the United States, where it publishes the Yellow Book East and the Yellow Book West.

The dollar's weakness therefore cannot be a help, making it imperative that the American businesses work even harder to make up for any negative currency translation.

Yell's online businesses, while proving a useful tool for consumers, are seen as pretty marginal to the company.

So where is the growth going to come from? The bulls reckon that growth from the US, where advertisers are deserting the incumbent publishers for independents such as Yell, will be more than enough to overcome future dollar weakness with rapid margin expansion to come as well. Sales growth in the US is expected to be 7 per cent or more.

In the UK, despite its size, Yell is still seeing 3-4 per cent top line growth to help maintain profitability. Cash generation is good and the dividend yield of 3 per cent might prove attractive but at the moment the prospective price earnings ratio of 13 leaves the stock fully priced. Steer clear for the moment.

Wait for Bovis's future developments

The housebuilders are labouring under two big negatives: the prospect of an extended period of rising interest rates and a government-commissioned review into ways of increasing the supply of new homes.

This has meant stocks in the sector have suffered. Bovis Homes' trading update yesterday should lift spirits, however. Bovis said that the second half of 2003 had been strong and, at the start of this year, prices were 10 per cent ahead of January 2003, while reservations were also 10 per cent up.

The company told us to expect an improvement in operating margin for the second half of 2003, when it reports full-year results. That would be an improvement on the impressive 25.6 per cent margins achieved at the half-year stage. While there can be no complaint about margins - which are only beaten by the specialist McCarthy & Stone - the company is criticised in the City for relatively sedate rate of turnover growth, which holds back total profits. This leaves its premium rating open to question, according to the broker Teather & Greenwood, as other less highly rated housebuilders will report greater 2003 profit growth.

The bigger issues weighing on the sector should become clear in the next few weeks. The City fears increased tax on builders from the Barker review but that would be a counter-productive measure. Also, the likely rise in interest rates over the next couple of years would still leave money cheap for home-buying.

Bovis has an excellent land bank for future development (equivalent to four years' output) - which easily underpins the current share price. There is also considerable bid speculation surrounding Bovis. The shares, which closed yesterday at 455p, are on a forward multiple of 6.5 times and are worth holding.

Inventive? Vodka bar chain will need to be

Inventive Leisure is going to have to concoct something pretty special if it is to reverse its dismal trading performance. A November profits warning left both its shares and investors with a nasty hangover; both suffered a relapse after yesterday's trading statement.

The group, which shot to fame with its chain of Revolution vodka bars, said like-for-like sales were 7 per cent lower over the three-week Christmas period. This was slightly better than the 8.5 per cent shortfall that prompted November's warning, but not much. What is even more disappointing is that this Christmas was up against meagre comparatives.

The culprits are some of Inventive's newer bars, suggesting the ideology of its exuberant management team just isn't catching on. The site in Aberdeen fared particularly badly, although the company is quick to point out that this contrasts with a steaming performance during its first year of trading.

Apparently Roy Ellis, the chief executive of the Manchester-based group, has some cunning tricks up his sleeve, but the market will have to wait until the group's "upcoming managers' conference" to learn what these are.

If students, Inventive's bread and butter, continue to shun townie watering holes once the winter term gets under way, as they have done for the past year or so, life could get yet more bleak for the company.

The shares, which fell 1.5p to 65p, trade on a price-earnings multiple for 2004 of about five times, which looks fair given its trading hiccups. Avoid.