Investment Column: Sterling's slump adds to Wolseley's woes

Wolseley

Our view: Sell

Share price: 201p (-85p)

Things are going from bad to worse in the housebuilding and construction industries. The British plumbing and heating supplies group Wolseley said yesterday that its half-year profit would more than halve as housing markets continue to slow. But Wolseley, which holds a substantial part of its debt in euros, has also been hit by the weakness of the pound. In the final five months of 2008 its net debt increased by about 20 per cent to £3bn, largely due to a £557m hit it took on exchange rate movements. Trading profit was down by 80 per cent in the UK, 60 per cent in Europe and 16 per cent in North America, while overall pre-tax profit fell by 66 per cent year on year.

Shares in Wolseley tumbled by 29.7 per cent yesterday, with the company warning that until consumer confidence returns and availability of finance for customers improves, it expects its performance to decline further.

There is further bad news for investors: with its stock still trading at around six times forecast earnings despite its recent falls, the building materials company remains more expensive than its more UK-focused rival Travis Perkins, which trades at just over twice forecast profit.

Yesterday's announcement had analysts at Numis saying that trading is "much worse than we expected and a higher level of net debt now seems to make [a] covenant breach inevitable at year end July 2009". Those at Collins Stewart reckon that a rights issue is equally inevitable. Both would be bad news for existing shareholders. Sell.



WH Smith

Our view: Hold

Share price: 350.25p (-4.75p)

Against the widespread carnage on the high street, WH Smith's recent performance – depressed but in line with expectations – has much to recommend it. Although not good enough for a buy, it is not deserving of the sell, sell, sell levied at many of its retail peers.

According to yesterday's trading update, overall like-for-like sales were down 5 per cent for the 20 weeks to 17 January, with high street sales falling 7 per cent, the entertainment business down 3 per cent, and travel, the stellar performer, down just 1 per cent.

Among all the falls, gross margins are a ray of sunshine. In both the high street and travel businesses (which runs outlets at airports and railway stations), margins are improved. And the five-year revival strategy, launched in 2005, has gone some way to cut WH Smith's reliance on the CD and DVD markets – which will also have helped to insulate it from the collapse of Woolworth's EUK business late last year.

City analysts are still maintaining full-year pre-tax profits estimates of around £79m for the year to August, and the group's price-earnings ratio of 9.2 is at a 10 per cent discount to the sector average. With margins improving and the chain's low-price products likely to hold up better than rivals' in a climate of reduced consumer spending, WH Smith is worth hanging on to, even if the shares did drop 1.34 per cent on yesterday's news. Strong cash generation and a robust balance sheet are also in its favour. Hold.



AT Communications Group

Our view: Hold

Share price: 14.25p (+1.75p)

AT Communications (ATC) describes itself as an "ICT company focused on the delivery of IP-based solutions and services to small, medium, and large enterprises". Translation: It provides IT and telecoms systems for businesses, with the chief executive, Alex Tupman, calling it a "small BT". The most lucrative bit is servicing these contracts, and the group has been expanding further into the managed service business to help boost margins.

The shares have taken a bit of a hammering since the summer; disappointing for a company in a sector that tends to be relatively resilient to a downturn. The shares were up 14 per cent yesterday, however, after a trading update forecast turnover and earnings before interest, taxation, depreciation and amortisation would hit expectations for the full year. The market had feared ATC would miss its targets.

There was good news related to the company's worrying level of debt. The group announced it had paid down £4m since June, cutting borrowings to £18m. The group is also working on a disposal "which will go a long way to reducing debt levels".

ATC also revealed interest in one of its subsidiaries, and a new three-year contract with BT to provide sales services. The house broker, Cenkos, said that trading on 1.5 times this year's earnings prices the company as a distressed asset, but yesterday's announcement should help to kick-start a re-rating. There might well be some upside, but that debt has to come down further, and we want a bit more clarity over the future. Hold.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor