Countrywide builds on recovery

The Investment Column
Anybody struggling to buy a house in London knows that after a long, lean spell estate agents are enjoying the good times again. Hambro Countrywide, the UK's largest agent, is no exception.

Operating profits jumped 80 per cent to pounds 19.5m in the six months to June, ignoring a one-off pounds 4.5m gain arising from Budget tax changes. It sold 44,716 homes, a rise of 16 per cent on 1996, and it should shift well in excess of 90,000 (83,800) properties this year. Summer sales are well ahead of last year, and although the rate of growth of transactions is bound to slow, there is plenty of room for further growth with buyers still scrambling for properties. So far the recovery has been concentrated in the South-east but prices finally appear to be rising throughout the country.

There is also scope to bolster profits by selling more life assurance policies and financial products to customers. Its new, speedy conveyancing service could also turn out to be a big earner.

On fundamentals the shares continue to look cheap, even after rising steeply over the past 18 months. Analysts forecast full-year profits of pounds 52m, putting the stock on a prospective p/e ratio of 10, excluding exceptional profits. Next year pre-tax profits should rise to pounds 70m and the p/e falls to just 7.

The problem is Countrywide's fortunes are inextricably linked to the housing market, even though it is eyeing up acquisitions in financial services in an effort to reduce its dependence on the industry.

Shareholders could find it difficult to offload stock when the notoriously fickle housing market falters again. Parent Hambros still owns 52 per cent of the company and, given it is currently the bank's biggest earner, it shows no signs of selling the stake. Only about 30 per cent of the shares are freely traded.

Admittedly, the housing market is unlikely to slump for the next few years, with consumer confidence sky high and the number of housing transactions still well off the 1980s peak. But Countrywide is vulnerable to any change in sentiment as its roller-coaster share price chart demonstrates. Investors may be better advised to take a punt on Hambros, where it is much easier to buy and sell shares. If the housing market recovery continues, profits from Countrywide should more than compensate for the continuing underperformance of its troubled banking division.