Recovery to boost MFI

The Investment Column
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The Independent Online
After a tough 1995, when soaring raw material prices took their toll, things are beginning to look reasonably encouraging at flat-pack furniture specialist MFI.

Though profits were down 30 per cent in the first half, the gloom lifted after the half-year stage as pressure on prices and margins eased.

By the year-end in April, pre-tax profits were 12 per cent down at pounds 58m. With talk of a housing recovery continuing, the position has continued to improve. Though sales were up only 2 per cent last year, they have risen by 15 per cent in 9 weeks since the end of April. Though this includes new openings and contributions from the French business and the new timber operation it is still an impressive hike.

Though the gross margin has been maintained, net margins have been hit by higher staff costs as the company expands the proportion of own-built furniture which has been increased from 51 per cent to 55 per cent over the year. Higher employment costs knocked a further 0.5 per cent off the net margin last year.

MFI's strategy is to roll out its new HomeWorks format to the whole UK chain while expanding overseas to decrease its reliance on the domestic housing market.

The HomeWorks format, which includes more kitchen accessories in a lighter, more modern design, has been introduced to 47 of the 184 stores. The plan is to convert the whole chain within two or three years. The French business made its first profit in 10 years, chipping in pounds 1m. Given the problems there it is surprising that the company is considering opening stores in Spain and Portugal too.

The Howden joinery business which was launched last autumn now has 18 branches. MFI claims the performance has been satisfactory though no figures were produced to back that up.

The shares have had a good run since last summer's slump, rising from 112p to 180p, up another 6p yesterday. This is within touching distance of the shares' all-time high since they came to the market at 118p in 1982.

Analysts have upgraded their pre-tax profit forecast to pounds 82m which puts the shares on a forward rating of 18. That is high enough given the patchy recent record.