Investment Column: Surge in DIY gives Kingfisher lease of life

Capita Group; International Personal Finance
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The Independent Online

Our view: Buy

Share price: 209.5p (+3.5p)

People wanting to move house face something of a dilemma. With interest rates scraping the floor, their new mortgage (if they can get one, that is) comes that much cheaper nowadays. That is the good news. The bad news is that many are worried that taking on more debt is a bit daft, given that their P45 may come any day.

The compromise for many is to improve their current home and for Kingfisher, the group that owns B&Q, that is the best news of all. Kingfisher issued its second-quarter trading update yesterday, topping most analysts' expectations. With the Office for National Statistics also saying yesterday that retail sales rose in June, the group should be feeling confident about the rest of the year.

We would argue that investors should feel equally happy holding the stock. Kingfisher's shares have been one of the better performers among retailers over the past six months, with the price jumping up by nearly two-thirds. While there was a small drop yesterday, we do not think there is anything to worry about.

The question that punters will want to ask is whether the charge in recent months has made the stock too expensive for new buyers. Analysts at Morgan Stanley suggest it might be, saying in a note: "Based on our existing forecasts, and [Wednesday] night's closing price, Kingfisher is trading on 16.8 times calendarised 2010 earnings, 7.5 times enterprise value to Ebitda and with a 2.7 per cent dividend yield. This compares with the UK general retail sector average of 14.7 times, 6.7 times and 3.7 per cent respectively."

Potential buyers should not forget that despite the ONS announcement yesterday, the retail sector is still expected to feel quite a bit of pain. However, there is a school of thought that Kingfisher probably deserves a small premium and, while some may want to wait for a bit of softening, we reckon Kingfisher shares are worth buying, even at this level. Buy.

Capita Group

Our view: Buy

Share price: 695p (-17.5p)

"It isn't right to sound too ebullient at the moment," says Paul Pindar, the Capita chief executive, of the current economic situation. Nonetheless, Mr Pindar cannot think of any substantial risks facing his outsourcing company, stressing that Capita benefits in a downturn by telling the private sector and the Government that it can save them money.

Target revenues for 2010 are already 90 per cent booked and the shares are cheap, he says, arguing that the stock price is the same as two years ago, but the company is 40 per cent bigger. Yes, investors have left, but that is because Capita is a long-term bet and other stocks surge at various stages of the cycle, he argues.

Plenty of the analysts disagree (Mr Pindar says he doesn't really care), with those at Numis advising clients to reduce. "Capita exhibits two of the most important financial characteristics from a valuation perspective, namely a very high return on invested capital and a high growth rate," they said in a note. "As such, this should translate into a very high price-earnings ratio. Our models support a fair value of 640p. The principle risk is a failure to manage the growth."

We agree that there are racier and cheaper stocks around but Capita should still be a core bet. Buy.

International Personal Finance

Our view: Hold for now

Share price: 117.75p (+38p)

What a day for investors in International Personal Finance (IPF), the doorstep lender in emerging markets. The company issued its second-quarter numbers yesterday, saying that the woes of the first three months of the year were behind it and that trading was in line with this time last year. The market was certainly encouraged and the group's shares closed the day 47.7 per cent higher.

Before punters curse, assuming they have missed the opportunity to buy, the chief executive John Harnett says that he stock is still cheap. Of course he would say that, but at least the watchers at WH Ireland agree with him. The experts have the group, which lends up to about £500 to clients in emerging markets, on a price target of 128p. Clearly, there was much to get excited about yesterday, and investors should take heart from the fact that IPF has moved away from having to issue a profits warning in May.

However, Mr Harnett concedes that the economic outlook in the markets in which IPF operates is still uncertain. In Hungary, for example, the group is having to take some radical action to offset some pretty dire macro-economic conditions.

As such, we would wait for another positive update before taking the plunge on IPF. Hold for now, but not for too much longer.

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