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
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...