Outlook at Allied Carpets rosy while spending spree lasts

THE INVESTMENT COLUMN

Ray Nethercott, managing director of Allied Carpets, did not enjoy the general election.

In the two months prior to polling day, like-for-like sales at the group slumped by 12 per cent as wary voters pulled in their purse strings.

It wasn't just Allied Carpets that felt the squeeze. The whole carpet market saw sales fall by 5 per cent in the six months to June compared with a 13 per cent rise in the last half of 1996.

Fortunately for Mr Nethercott and the rest of the industry, sales have boomed since mid-June.

The combination of building society windfalls and the buoyant housing market has boosted like-for-like sales by 14 per cent in the last six weeks.

Sales of pounds 1,000-plus carpets are soaring.

Of course, this kind of performance should be expected. If a carpet retailer cannot coin it in the current environment it never will.

Even so, the figures reassured the market, which has been unnerved by Allied's performance since its flotation last summer.

Priced competitively at 215p last July when the new issues market was fraught, the shares soared to 320p in January.

But a disappointing set of interims and fears of a sales slide had pushed the shares below the issue price by last month.

Since then they have begun to climb and rose another penny to 253p yesterday on the back of full-year profits in line with expectations at pounds 16.7m, up 15 per cent.

Allied's market share has increased from 12 per cent to 14 per cent in the year, clawed from the independent sector. A record 36 openings took the store total to 238 by the year-end and the company plans to expand the number of Carpetland, mass market format stores, from 24 to around 100 in four to five years.

Allied should also benefit from the strong pound, which is making carpet imports cheaper.

And its Homevision system, which enables customers to "see" computer generated images of carpets in a digital photo of their home.

For now, then, things look rosy. But longer-term, the market will become more choosy about which consumer durables it wants to believe in.

On current-year forecasts of about pounds 22.5m Allied's shares trade on a price-earnings ratio of 14.

That is similar to the rating of arch-rival Carpetright which is chaired by Lord Harris.

With its better developed, more established store portfolio, Carpetright may prove the better bet.

Recent recruits boost CRT

When Michael Milken, one-time jailbird and former junk bond dealer and Larry Ellison, chairman of Oracle, teamed up to buy a controlling stake in CRT, the IT training and recruitment company last autumn, the market sat up and asked why.

If Knowledge Universe, Milken's and Ellison's new US group, wanted to buy CRT there seemed little sense in snapping up half now only to buy the rest at a higher price later. Rather than an outright bid, their interest seems more in CRT's potential to expand outside the UK to become a serious force in IT education and staffing. To kick start that expansion CRT got pounds 109m cash for KU's stake and still has pounds 60m to spend. More important for KU, though, is that when CRT is ready to bite off something really big, as a quoted group it can raise public money. CRT's ambitions look well-founded. Before pounds 60m of acquisitions, underlying operating profits to April rose 18.5 per cent to pounds 9.8m on like-for-like sales up 16 per cent to pounds 120m.

Unlike regular recruiters and trainers, vulnerable to economic boom-bust cycles, the IT market, over 70 per cent of CRT's business, is being fuelled by millennium and euro changes. Demand for IT should continue to grow into the next century as a backlog of deferred IT spending is addressed.

With a desperate shortage of IT staff, CRT's involvement in training, 27 per cent of sales but almost 70 per cent of profits, means it can offer customers skilled staff more readily than pure recruiters. CRT's push overseas will probably involve buying a UK company with European operations, a safer option than launching into the US, though that will come, or buying a non-UK company.

CRT's shares soared 84 per cent to 276p following the KU deal, but have since fallen back, hovering around the unchanged price of 228.5p yesterday as hopes of a bid or a rush of big acquisitions faded. Williams de Broe, house broker, forecasts pounds 20.3m profits this year. A forward p/e ratio of 23 is no bargain, but worth a punt long term.

N&P acquisition costs Booker dearly

Ever since Booker bought cash-and-carry rival Nurdin & Peacock (N&P) for pounds 267m last November, its investors have gone shopping elsewhere and its shares have slumped nearly a third. There is a suspicion amongst analysts that Booker paid too much and that when it delved into N&P's books it found a business in much worse shape than it expected.

Yesterday Booker tried to calm shareholders' nerves by announcing that the integration of N&P was proceeding ahead of schedule. It has shut down N&P's head office, with the loss of more than 300 workers.

Overall, more than 1,000 jobs will go as Booker shuts about 40 depots, a fifth of its enlarged network.

While Booker's shares firmed 6.5p to 270p on the statement, the speed that Booker sheds its workforce will have little extra impact on profits this year.

The real savings will come from a new regional distribution network. Unfortunately severe teething problems have delayed the introduction of this until mid-1998. Until then, Booker will run up extra costs by running two networks in parallel.

The shake-up should still bring cost savings of around pounds 10m a year this year, rising to more than pounds 20m by 1999.

However the real fear going forward is that Booker will be reliant on the low-margin cash-and-carry business where its main customers, the independent traders, are continually being squeezed by the might of the supermarket giants.

At least Booker should maintain last year's dividend of 23.8p, putting the shares on a juicy yield of 11 per cent. That should support the share price. NatWest Securities forecasts full-year profits of pounds 98.5m, putting the shares on an inexpensive price-earnings ratio of 9. However given the low quality of cash and carry, no more than a hold.