Kitchen sales should boost MFI

The Investment Column

There are few stock market sectors as highly volatile as retailing at the moment where the slightest slip is punished mercilessly. Just ask shareholders in MFI. Shares in the furniture group soared from 115p at the beginning of 1995 to 209p last autumn on strong sales increases and the recovering housing market.

But news of a sales slowdown in March hammered the stock, which halved to just over 100p.

With its volatile past, the market has always been slightly jumpy about MFI so it is no surprise that the retail watchers are divided on the prospects for the group, which yesterday reported a 21 per cent increase in pre-tax profits to pounds 70.3m for the year to 26 April.

On the positive side, like-for-like sales have started to move ahead since the May election and in the first nine weeks of the year are 5 per cent up on the same period last year.

That compares with a strong increase of 15 per cent the previous year and so is a creditable achievement.

Perhaps the most encouraging news is the level of enquiries for kitchens which are thought to be ahead by a double-digit figure on last year.

MFI typically converts 60 per cent of these enquiries into sales and it is the more expensive kitchens such as Schreiber that are generating the most interest.

Then there are the Homeworks conversions where half the stores have been updated to the new format which offers wider ranges and an airier feel. These conversions still deliver a strong sales increase.

But there are still uncertainties over MFI's market. One issue is the degree to which it will benefit from the windfall factor which John Collier, chief executive, says has not yet filtered through to its kitchen and bathroom sales.

Another is the housing market which MFI says is not booming outside London and could be hit by today's Budget measures on mortgage interest tax relief and stamp duty.

It is also unclear how MFI is faring on market share. It admits that it is reviewing its position in upholstery, which accounts for 3 per cent of group sales and does not make any money. And with strong sales from the likes of B&Q and the John Lewis Partnership these gains must be coming from somewhere.

Another concern is rising costs with higher interest charges as well as rising rent and rate costs. Capital expenditure jumped from pounds 60m to pounds 73m last year and will rise to pounds 80m in the current year.

The wide spread of brokers' forecasts for MFI shows how hard the company is to judge. But on UBS's figure of pounds 77.5m, the shares, down 6p to 129p yesterday, trade on a forward rating of 12. This is a 10 per cent discount to the sector and after recent weakness the shares rank as a hold.

Crest cashes in on housing boom

Crest Nicholson, the Surrey-based building and construction group, has been nothing if not accident-prone. The business had a torrid recession after over-extending its land bank in the 1980s and then came a cropper in 1995 as a result of mismanaged expansion in the Midlands and the East. That led to a major clear-out of middle managers, but with a low base to build from and with half its business still in the currently accelerating south-east property market, Crest should have a fair wind behind it this year.

The interim figures to April certainly bear out that analysis. Pre-tax profits more than tripled, rising from pounds 2.21m to pounds 7.21m, on turnover 15 per cent ahead at pounds 153m.

The figures were driven by residential housing, which saw margins soar from 3.8 per cent to 11.5 per cent.

The improvement is all the more impressive given that there was no help from residential land sales this time, which raised pounds 5.7m in the first half of 1996.

Clearly, management has made strenuous efforts to rein in costs which had been running out of control.

Even so, Crest has cashed in on the gathering south-east housing boom. Overall reservations jumped by more than 30 per cent in the period, leading to a 10 per cent rise in numbers of houses sold.

Meanwhile, higher prices helped boost the average selling price by 8.6 per cent to pounds 104,000.

Naturally, what happens with mortgage interest relief and stamp duty in today's Budget is causing the company some concern, at least in the short term.

The omens on that front are encouraging, given the continuing strength of the market and the fact that the expected dip caused by the May general election failed to materialise.

But with its history, the market will want evidence from Crest that it has truly turned the corner and there were some jitters yesterday that the formation of a new western division is the precursor to further geographic expansion.

So even with SBC Warburg bumping up its full-year profit forecast by a third to pounds 20m yesterday, the shares, up 1.5p at 104p, on a lowly forward multiple of 9, are only attractive for the stout-hearted.

Metroline set for a comfortable ride

Metroline, the London bus operator which is driving to the stock market later this month with a value of around pounds 35m, looks an attractive prospect. Metroline's management bought the business from London Transport in 1994, one of 10 such businesses privatised over the past few years. Since then turnover has risen from pounds 16m to pounds 37m and profits have more than tripled to pounds 3m.

Most of its income is fixed and regulated by London Transport, which has awarded it five-year franchises to run services throughout north-west London. But by improving efficiency and cutting back on overheads Metroline has been able to significantly improve margins. It has already done most of the hard work and margins are unlikely to rise much further. That said, Metroline is winning plenty of new work from competitors as new routes come up for grabs and the London bus market should continue to grow steadily if the Labour government is serious about endorsing public transport. It is also growing the top line by diversifying into new areas such as providing buses on tourist excursions and supermarket shopping trips.

Acquisitions should follow quickly after the flotation. It is raising up to pounds 5m to pay off debts and give it the financial fire power to make purchases. Targets include the host of small bus companies in and around London.

Metroline forecasts profits of at least pounds 4m for the year to this October. Analysts reckon the shares will be priced on a prospective price-earnings ratio of between 10 and 11. That puts the stock on at least a 20 per cent discount to rivals such as FirstBus or Stagecoach.

Bid speculation is also likely to add spice to the share price. Metroline is believed to have had informal takeover talks with FirstBus. It has decided to go it alone but there are plenty of predators ready to pounce if its managers steer the wrong path. Investors should climb aboard.

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