Investment Column: Dynamic approachand a firm foundation pays off for Bellway

UBM; Interserve
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The Independent Online

Our view: Buy

Share price: 698.5p (21p)

"T he 100 per cent mortgage is back," screams Bellway's website. Of course, there's going to be small print. But house-builders have had to innovate and this has seen them getting much more actively involved in home financing.

It seems to be paying off for Bellway, which yesterday unveiled creditable results for the year ending 31 July. Completed sales stood at 4,922 homes against 4,595, turnover at £886.1m against £768.3m and pre-tax-profits at £67.2m against £44.4m.

Crucially the £175,613 average selling price achieved is well ahead of the £163,175 of the previous year. And the group felt able to increase its dividend to 8.8p from 6.7p.

In line with Hometrack's figures earlier this week, the South was the star in terms of prices with northern developments treading water. But operating margins also increased – while others are facing up to sharp rises in raw material costs, Bellway's are negotiated 12 months in advance, smoothing volatility. It has also been able to negotiate with contractors from a strong position. With building work still limited, contractors must price keenly to snap up what is available.

Costs still face pressures (regulation, etc) but Bellway is nonetheless in an enviable position. And we don't think house-builders are a bad place to park one's money, with the sector having made efforts to cut costs, reduce debt and build up banks of cheap land. Britain also still faces a shortage of housing and even though the economic outlook is poor, interest rates are set to stay low, while people who have sat on their hands, putting off moving or buying, are starting to trickle back into the market.

What's more, Bellway trades at an enormous discount to its net asset value per share, forecast by Panmure at 921p for 2012, although the forecast yield ( 2 per cent) is nothing to write home about.

On the downside, Bellway has faced criticism over its executive remuneration policies. For us that is a black mark. But we think Bellway is looking cheap now and merits a buy (we held at 760p last March). We'd just urge investors to vote at the annual meeting.


Our view: Hold

Share price: 481.8p (+16.6p)

The media sector is usually the first to feel the impact of a chill, but while UBM's share price has been undergoing an alarming slide, there aren't any signs of a downturn in the numbers. Yet.

Yesterday's nine month trading update was remarkably encouraging given the recent economic news. Revenue was up by 9.8 per cent to £706.2m. The events business was a star (revenues up a stunning 26.6 per cent), although print (sadly) continued to struggle (revenue down 17 per cent).

What makes UBM worth keeping tabs on is that it has been steadily shifting its portfolio. The declining print division is less important, while 22 per cent of revenues now come from (so called) emerging markets. Which ought to provide it with some protection should Western economies sink into the mire.

On valuation grounds, UBM is now looking cheap after the struggles its shares have been going through, trading at just 8.5 times full-year earnings while offering a cracking prospective yield of over 6 per cent, although the £51m net debt is higher than we'd like (it is at 2.4 times earnings before interest, tax, depreciation and amortisation).

We said hold in April at 537.5p. But because of the economic outlook we're still wary of upgrading to a buy, even if the valuation looks increasingly compelling. All the same, this is no time to exit, not least because of that yield.


Our view: Buy

Share price: 309p (-1.4p)

It's a hard life being an analyst. The scribblers who keep watch on Interserve are enjoying the sun out in Qatar so they can get a look at the operations the support services, maintenance and building group has in the country that will controversially host the 2022 Football World Cup.

Controversy over prestige events aside, what should interest investors about Qatar is that the country is forecast by the IMF to be the world's fastest growing economy in 2011, with a GDP growth rate of 20 per cent and plans to splurge $225bn (£143bn) on new infrastructure between 2011 and 2016. Not a bad place to be for Interserve, then.

With expanding businesses in other growing regions (eg, Australia) Interserve has felt comfortable with reiterating its pledge to double earnings over five years. It's working in the right places and the right sectors (such as energy) that will help cushion it from the turbulence in this part of the world.

We were buyers at 223.8p last year, so the shares have done very well for us. But they remain distinctly under-valued at 6.6 times forecast full-year earnings while yielding 6.2 per cent, a yield which doesn't look under any threat, not least because payments to fill a hole in the pension scheme are predicted to fall quite sharply. Buy.