Investment Column: Taylor builds on housing market stability
Greene King; Hampson Industries
Friday 01 July 2011
Our view: hold
Share price: 37.78p (+1.25p)
Taylor Wimpey's share price enjoyed some steady gains yesterday after the house-builder became the latest company to highlight stability in the housing market.
Looking ahead, the group said it continued to expect the market to remain "relatively stable" over the remainder of the year, "despite the ongoing economic uncertainty and restricted mortgage availability".
In response, Panmure Gordon reiterated its "buy" recommendation, citing the fact the stock was trading well below its full year net asset value (NAV) forecast of 59p. The broker did, however, note that "Taylor Wimpey does have a little bit more gearing than its peer group and the business carries a little most risk... and there we believe that it should trade at some sort of discount to the sector".
Still, it stuck with the positive stance as the NAV discount of around 40 per cent was "simply too wide". Fair enough. But though we take the point, and while we were encouraged by Taylor Wimpey's update, we remain cautious, owing to the points highlighted the by the company itself.
Mortgage availability remains low in historical terms and though the market appears to have stabilised, the macroeconomic picture remains far from cheery. Yes, the stock looks cheap. But the stock market is a funny place where sentiment often matters as much – if not more – than bald valuation metrics.
We quite agree that there is much scope for upside gains in the long term, once the housing market recovery is in full swing. But for now, it remains challenged by factors in the wider economy – the raft of public spending cuts are coming down the pipe, the still-high inflation and the prospect of higher interest rates later in the year.
Owing to its slim valuation, we would not sell. But we are not quite convinced that it is time to buy.
Our view: hold
Share price: 487.4p (-30.6p)
The brewer and pub operator Greene King presents a tough call. After a good run, the company's shares were on the slide yesterday, not least because investors were jittery over the warning of a "testing" year to come thanks to the ongoing consumer squeeze.
For us, they have been strong performers – we've been buyers since the end of 2009, when they stood at 422p. We bought again in February, at 472.7p, and with the struggles the pub and brewing sector faces you could argue that it is time to bank profits. However, the past year has hardly been easy and yet the company has performed well. Turnover was up 6 per cent, breaking through the £1bn barrier for the first time.
Pre-tax profits were up 14 per cent at £140m and, significantly, the dividend was up 7.4 per cent at 23.1p. With the payout more than two times covered by earnings, it looks solid. The net debt of £1.4bn makes us a little queasy but fixed charges such as interest payments and rent are 2.6 times covered.
The company's food offering is performing strongly and its expansion strategy is aggressive and ought to help it to continue to grab market share. Plus, the valuation, at about 10 times full year earnings, is undemanding with a forecast yield of 5 per cent. We're happy to keep holding.
Our view: avoid
Share price: 25.5p (-3p)
Times are tough for Hampson Industries. Revenues may have grown by 17 per cent at the aviation tooling and component-maker over the past year, hitting a comfortable £198m according to annual results published yesterday.
But increasing debts and "operational issues" at the company's Detroit facility have dragged pre-tax profits down to just £10.8m, against the £25.2m seen last year.
No matter that Hampson Industries warned earlier in the year about the issues at the US factory (costed in the accounts at £34.6m in goodwill impairment). The company's shares still dropped yesterday.
Hampson's chairman Chris Geoghegan did put on a brave face, however, talking up the revenue growth in the face of "strong macro economic headwinds and industry pressures" and flagging up operational improvement plans and advanced talks to sell off non-core assets.
In the end, though, the dreary figures – combined with revelations about the £3.1m sale of its ailing car-parts business, dubbed by a Judge as "fraudulent" – are rightly taking their toll and make us cautious.
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