Investment Column: Redrow's shares are looking over-priced

Pittards; Falkland Islands Holdings
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The Independent Online

Our view: Avoid

Share price: 130.4p (+0.1p)

Comparing yesterday's full-year numbers from the housebuilder Redrow to what it churned out 12 months ago is like looking at chalk and cheese. A year and a rights issue later, Redrow's results were ugly.

The group said it had returned to a pre-tax profit, albeit only £700,000, but the market will have been encouraged by news of more completions, a larger land bank and, crucially, higher average selling prices.

So, is all good for Redrow? Well, almost. The chairman, Steve Morgan, said that despite the improved figures, the housing market was still being stymied by a lack of mortgage finance. He called for a return to 95 per cent mortgages that should be backed, he said, by a Government insurance indemnity scheme.

Good luck, Steve. We doubt his proposals, however sensible, will gain much traction and investors will be left to contend with the market in its current, unaided, state. We would worry that poor sentiment could restrict the market and therefore put pressure on Redrow's share price, which has been falling steadily for the past six months and dropped by ?? per cent yesterday.

Despite the general trend, the shares have risen by a third in the past fortnight, with analysts at Panmure Gordon pointing out that the 2010 calendarised net asset value of 146p puts Redrow at a premium to others in the sector. Investors should also note that there is no dividend, with Mr Morgan restating that payments will return only at "the appropriate time", whenever that might be.

The long-term trend in housing is favourable but that does not mean investors should buy a pricey share today. There are points to recommend Redrow, not least the improvement since Mr Morgan returned to take day-to-day control of the business, as well a successful launch of the Heritage housing range that has so far sold well. But for the time being there is not enough to attract us, so avoid.


Our view: Speculative buy

Share price: 2.5p (+0.25p)

Pittards produces leather for everything from gloves to shoes, so its fortunes are linked to fluctuations in consumer demand. Stronger retail sales mean more business for its customers, which include big international brands.

While the Yeovil-based company has seen some recovery in demand so far this year, it concedes that, beyond underlying improvements in trading, the market is largely being driven by restocking. Inventories thinned out during the slump and the restocking is expected to be complete by the end of this year. So consumers will be key for Pittards' fortunes going into next year. Given the uncertain outlook, particularly in key markets such as the US and Britain, this may not sound like the most attractive of investments.

But the market seems to be pricing in the concerns while overlooking the recovery prospects. Pittards' stock trades on a multiple of less than eight times forecast earnings for 2010, falling to 5.6 times in 2011. That seems to suggest that shoppers are poised to stay at home. We disagree. The economy may be on life-support but it is not dead, so we make Pittards a speculative buy.

Falkland Islands Holdings

Our view: Hold

Share price: 344.5p (-3p)

Falkland Islands Holdings is really a mini-conglomerate. In addition to providing just about everything on the islands themselves, it also owns the Portsmouth Harbour Ferry Company and Momart, which deals with the handling and storage of fine art and antiques. But what excites everyone is its holding in Falkland Oil and Gas (FOG), whose shares fell precipitously in the summer when the results from its exploratory drillings in the South Atlantic were anything but good.

FIH fell along with it and, while the FOG holding is really only the icing on the cake, oil and the potential for finding it in the South Atlantic does have a fairly big impact on FIH's other operations on the islands. It affects such things as car sales, property prices and the like. So the bad news from the test drilling was a big disapointment. Yesterday's AGM statement indicated that the UK economic climate is not helping the businesses here.

However, the group's finances are looking perky, not least because it has prudently paid down debt and cut interest charges. We said buy FIH's shares at 310p last September and those who did so have been rewarded.

That said, the shares leapt to more than 550p this summer so it seems pointless to sell now. Relying on the oil is a gamble but the advantage of investing in FIH is that it still has a solid business even if no oil is found. The shares are not cheap at 19 times 2011 forecast earnings and a prospective yield of 2.45 per cent, but hold for now.