Investment Column: Home Retail bid rumours fail to convince

Amlin; Porvair


Our view: Sell

Share price: 208.1p (+3.5p)

Home Retail was back in the spotlight yesterday after it emerged that a US private equity investor had bought a 4.25 per cent stake in the owner of Argos and Homebase.

Madison Dearborn Capital Partners typically invests between $100m and $600m in each holding and it has raised its stake in the general-merchandise group from 3.2 per cent in the middle of March.

Ahead of its full-year results on 20 April, the purchase lifted shares in Home Retail, partly as it rekindled persistent speculation of a takeover bid. Of the potential suitors, the Walmart-owned supermarket chain Asda was believed to have considered a bid for the group in the spring of 2010, though it decided against an aggressive non-food land grab.

While the speculation surrounding Asda or a buyout giant launching a bid has refused to go away, we are not convinced it now holds much more water than a Homebase plant pot.

This is partly because the group's profits, margins and earnings per share are set to decline over the next year and the outlook for UK consumers looks as tough as a hoodie in one of the group's Argos stores. As recently as last month, the company guided down its profits for the year to the end of February this year to between £250m and £255m.

In our view, a break-up of the group is far more likely, but not for the foreseeable future. In its defence, Home Retail has a strong management team, generates lots of cash and has completed a £150m share-buyback in the past year. Furthermore, Argos has a slick multi-channel operation and performed far better than many expected over Christmas.

But Home Retail's shares have jumped around 10 per cent this year and now trade on forward earnings multiples of 11.2 times, which is by no means a bargain.

According to Seymour Pierce, a private equity takeout model implies a valuation of around 280p a share. But with consumer spending likely to be in the doldrums for the rest of this year, we think a bid is unlikely and Home Retail is better left alone.

Amlin

Our view: hold

Share price: 389.6p (+2.9p)

Insurers are still counting the cost of the earthquake in Japan, and as Amlin showed yesterday, huge uncertainty remains over the payouts they face.

The Lloyd's of London insurance group said the initial estimates of its losses in the first three months of 2011 could be anywhere between £205m and £275m. This also includes the more predictable cost of the floods in Australia, forecast at £15m, and the £110m incurred from the second earthquake in New Zealand. This is below the £160m hit from the first quake in the region.

Of course, if there's one thing investors hate, it is uncertainty. While these forecasts are not the most precise, they should offer some comfort to the market. That said, Royal Bank of Scotland's Joanna Parsons explained that full-year forecasts would remain uncertain, as we still have three-quarters to run until the end of the financial year, and we have yet to see the impact of the hurricane season.

On the upside, the group's reinsurance strategy means that it should be relatively well-protected from further catastrophes. RBS has the stock on a forward earnings multiple of 7.3 times, which looks cheap, and the forecast rise to the dividend yield looks enticing. But that pesky uncertainty makes us nervous.

Porvair

Our view: Buy

Share price: 115.5p (+10.5p)

Porvair is surfing the wave of the global economic recovery, and if the first months of 2011 are anything to go by, this year will be a corker.

The filtration specialist saw revenues soar by 8 per cent in the four months to March, according to the interim management statement published yesterday. The update was a litany of good news: borrowings down by 31 per cent, order books consistently strengthening, revenues not only ahead of last year but also significantly up on management's expectations.

Specifically, the metals filtration division sales shot up 14 per cent, extending the healthy recovery in 2010, while microfiltration sales climbed 4 per cent, with a boost from improvements in the recession-battered aerospace industry. Energy is also a strong growth area, with a £2m increase in orders for nuclear and broader energy projects in March alone. What's not to like?

Start your day with The Independent, sign up for daily news emails
Sport
sportSo, how closely were you paying attention during 2014?
Arts and Entertainment
Dennis speaks to his French teacher
tvThe Boy in the Dress, TV review
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
The Plaza Theatre in Atlanta, Georgia was one of the 300 US cinemas screening
filmTim Walker settles down to watch the controversial gross-out satire
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
Life and Style
Mark's crab tarts are just the right size
food + drinkMark Hix cooks up some snacks that pack a punch
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all