Investment Column: BSS is solid, but wait for tougher markets

Topps Tiles; Speedy Hire
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The Independent Online

Our view: Hold for now

Share price: 281.25p (-0.5p)

Nobody needs to be told that industrial suppliers have had it very tough recently, which makes yesterday's steady-as-she-goes full-year numbers from the plumbing and heating market distributor BSS all the more encouraging.

The group posted flat profits, forecasting economic improvements by 2010. Being bullish is something that clearly comes easily to the company, which centres the investment case on the belief that BSS will outperform its peer group. And the case has its supporters. The experts at Panmure Gordon argue that because of a number of factors, including relative balance-sheet strength, the lack of a rights issue when others have asked investors for more cash and a better-than-average operational performance, backers should expect the shares to be expensive.

"The calendar 2010 price-earnings ratio is 9.3 times, which compares favourably to its peers [also] on 9.3 times... [and] the company deserves to trade at a premium to the sub-sector," Panmure says, stressing the importance of the maintained dividend.

We would be a bit more cautious. While accepting that, in its sector, BSS is emerging as an outstanding name, we would be happier to invest in markets that are showing signs of growth, rather than simply predicting them. According to the Panmure Gordon watchers, BSS yields just 2.8 per cent and we would be looking for more than that to take a punt on what remains a fragile sector. Hold for now.

Topps Tiles

Our view: Sell

Share price: 78p (+13.5p)

Don't panic! You can come out now, the worst is over. Or at least it is according to Topps Tiles, the tile and wood-flooring retailer that has been roundly walloped by the downturn.

Its chief executive Matthew Williams says that he is satisfied the group has "come through a tough trading period and has performed well in the circumstances". Moreover, the group says the rate of sales decline in the first few weeks of the company's second half has slowed, a message that sent the stock up an impressive 20.9 per cent yesterday.

If the economy has turned the corner, maybe it is the time to buy Topps Tiles, not least because the shares trade at a heavy discount. According to analysts at its house broker KBC: "Trading on a 2010 price-earnings ratio of 10.7 times, Topps is trading on a material sector discount. With the shares on just 4.4 times peak earnings, when Ebit margins were greater than 20 per cent, we believe the share price has yet to factor in the group's recovery potential." Investors should also be encouraged by Topps' effort to cut costs and debt.

We are not convinced by the economic recovery argument, however. (It would be hoped that almost every stock would improve in healthier economic times.) Mr Williams concedes that Topps Tiles is dependent on discretionary spending, and with unemployment marching on, and showing no signs of abating, it is difficult to make a compelling case for stocks such as Topps. The fact that first-half profits fell 57 per cent and the interim dividend disappeared does nothing to improve the matter.

The shares were having a stellar quarter, up 177 per cent, even before yesterday's numbers. We would take the opportunity to take profits. Sell.

Speedy Hire

Our view: Sell

Share price: 176p (-12.25p)

Unlike Topps Tiles' assertion that there is light at the end of the recessionary tunnel, there was no attempt to hide the nastiness of trading conditions for the tool-hire group Speedy Hire yesterday.

The stock fell 6.5 per cent after its chairman, David Wallis, said: "Trading in the early part of the year remains challenging. The difficult conditions which were prevalent in Q4 of [financial year] 2009 have continued into early 2010, with activity to date being more subdued than anticipated, largely due to contracts being delayed or deferred... The group does not believe this market will show any meaningful signs of growth for another 12 to 18 months." Add to this that the group's debt is worryingly high, at £248.4m, with the analysts at Killik saying the shares remain "high-risk", and there seem to be few reasons to back the shares.

The company argues it is "dealing effectively with the short-term challenges which it faces" and that priorities are unsurprisingly to "maximise revenues, optimise costs, generate cash and reduce bank debt", which is all to be applauded. The measly valuation of the shares will encourage some, as will yesterday's full-year results, which showed a 29.5 per cent drop in adjusted pre-tax profits, which were in line with expectations. It is impossible to back the shares, however, given the grim outlook. There are better places to put your money. Sell.

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