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Homeworks pays off for MFI as sales creep up

On the face of it, yesterday's trading update from MFI signalled that at least one of the pressures affecting the furniture retailer was easing. Continuing sluggish retail demand in the UK has kept the lid on sales growth in 1995: an increase of 1.3 per cent reported at the half- way stage was not maintained into the third quarter.

The group says that sales were up 2 per cent between mid-November and the end of February, which includes the key post-Christmas selling period. With trading "poor" in the run-up to the festive season, that implies growth of nearer 4 to 5 per cent in the new year period. The news was welcomed by the stock market yesterday, which marked MFI's shares 6p higher to 158p.

But that may be premature jubilation. Depressed sales have been only part of the group's problem. Margins have been under pressure for some time from rising raw material prices. Hopes in December that reductions evident then would ease the situation now look overdone.

MFI indicated yesterday that although gross margins have recovered some of the ground lost in the first half, they will still be down on the year. It appears that lower costs are taking longer to feed through the buying chain than expected and the benefits will not be felt until next year. Margins could end the year a full point lower than last year, making 1995/96 the third year in a row in which returns on sales have fallen.

Admittedly, there was better news from elsewhere yesterday. The initial roll-out of the new MFI Homeworks format, which extends beyond the traditional ranges to include beds, pots and pans and the like, has clearly been a success. Sales outperformed the rest of the chain by 12 per cent, triggering the next phase of the conversion programme which should see another 35 to 40 of the existing 185 chains changed to Homeworks.

France, meanwhile, has shrugged aside the strikes to record a 50 per cent increase in orders since Christmas. But the business is small and, given the record and the cloudy outlook in the UK, MFI shares remain overvalued on a forward rating of 20.

Henlys speeds ahead of rivals

Henlys shareholders who supported management in fending off a pounds 30m bid from the rival motor dealer Cowie more than three years ago have been amply rewarded for their loyalty. Since then, the shares have outperformed the rest of the stock market by over 450 per cent and put Cowie's own performance in the shade.

Yesterday, the shares added 16p to 589p as the motor distributor and bus builder unveiled another cracking set of results. Pre-tax profits climbed 57 per cent to a new record of pounds 25.3m in the 12 months to December.

The figures were boosted by some sure-footed acquisitions. The pounds 31m half- share in Prevost Car, a Canadian bus maker bought by Henlys with Volvo, chipped in pounds 4.5m to operating profits in just seven months.

Northern Counties, acquired at the same time, added pounds 1.3m for an outlay of pounds 12m.

But, more importantly, the latest results have borne out management's determination to build its position in the bus and coach market, despite what has turned out to be one of the worst recessions ever to hit the industry.

Stripping out acquisitions, underlying profits from buses and coaches roared ahead 69 per cent to pounds 14.4m.

After seven lean years, Henlys has cashed in on last year's recovery, which saw coach sales leap 45 per cent and bus demand rise 23 per cent. But management deserves much of the credit: foreseeing the eventual end of the drought in orders caused by deregulation and recession, they have been patiently building market share.

From a standing start in 1991, Henlys has grabbed a market-leading position in buses in just three years. The impeccably-timed Northern acquisition, which took the group into double-deckers in a year when registrations doubled, added 10 points to its market share, taking it to 39 per cent.

Henlys now leads the combined UK bus and coach market and with bus fleets typically 13 to 15 years old, the outlook is bright, reflected in a pounds 70m year-end order book.

The outlook for motors is less certain, but Henlys' distribution side did well to maintain underlying profits in another difficult year for the market and a cost-cutting programme should underpin future margins.

Profits of pounds 33m this year would put the shares on a forward multiple of 15. Still reasonable value.