Investment Column: Topps Tiles is cheap, but it deserves to be

Carluccio’s; Entertainment One
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The Independent Online

Our view: Hold

Share price: 54.5p (-6.5p)

It's a nervy time for retailers that rely on discretionary spending related to the housing market.

A touch of this nervousness came through yesterday in the pre-close trading statement of the flooring specialist Topps Tiles, although it managed to avoid a profit warning like the one Carpetright issued last week.

Referring to the 27 weeks to 3 April, Topps said the results demonstrate that consumer confidence remains "unstable and trading patterns during the second quarter remain subdued". Similarly to Carpetright, Topps said it had not seen a bounce-back in trading since the post-Christmas snow melted, which suggests that consumers are wary about splashing out on home improvement projects.

Following the update yesterday, some analysts cut their full-year pre-tax profit forecast for Topps to £16.6m from £21.2m on the assumption of a flat performance in the second half. However, these factors should not detract from a significant improvement in trade over the half year. Like-for-like sales rose by 2.1 per cent over the 27 weeks, compared to plummeting by 18.5 per cent for the same period the previous year. Total revenues will come in up 4.5 per cent at £91.5m over the first half.

Topps, which has 309 UK stores, helped itself by taking an axe to its cost base last year, but it has also been aided by a handful of smaller specialist players hitting the buffers during the recession. Perhaps with a sense of schadenfreude, Topps said it expects to continue to benefit from this capacity coming out of the market.

The retailer also reiterated its cautious approach to store expansion, which led to no net shop openings in the second half.

Certainly, the fact that shares in Topps, which trade on 2010 price to earnings ratio of 10.2 times, represent a discount to the sector may tempt some brave investors. But given the fragile recovery in the housing market, continued hibernation of consumers and a sense of foreboding among consumers over what the next government may do to reduce the public sector deficit, we think that investors should wait 12 months before some investment DIY in Topps. Hold.


Our view: Hold

Share price: 92p (+2p)

Carluccio's has been doing well. Yesterday's update from the Italian restaurant chain revealed that, despite some harsh weather at the beginning of the year, trading across the network has continued to perform ahead of expectations.

Turnover in the 26 weeks to 28 March was 8 per cent ahead of last year. At the same time, the company has been extending its reach, setting up its stall in Exeter, Wimbledon and Cardiff, taking its tally to 45 locations.

Beyond the UK, the company's Middle Eastern franchise has opened a second Carluccio's in Dubai, while a third is expected this month. In Ireland, the stalled rent negotiations that led to the closure of the successful restaurant in Dublin have been resolved and the doors reopened after a week. Coupled with a strong financial position and a supportive valuation, then, the Carluccio's investment case seems intact, with the shares trading on a multiple of 15.5 times KBC Peel Hunt's forecasts for 2010.

And yet, we must err on the side of caution. The problem isn't Carluccio's, but the harried British consumer. And this doesn't bode well for sentiment.

With the latest GfK NOP survey showing that UK consumer confidence fell in March, given this uninspiring backdrop, we wouldn't buy Carluccio's until the clouds clear. Hold for now.

Entertainment One

Our view: Buy

Share price: 67.75p (+3p)

Vampires are all the rage. They are no longer confined to the evil bloodsuckers as portrayed by Christopher Lee and Gary Oldman, but have made the improbable leap to brooding romantic heroes. While HBO's True Blood has found a solid following, it is the Twilight series, from the books by Stephenie Meyer, that has hit box office and DVD gold.

The company that has distribution rights to the films in the UK and Canada is Entertainment One, and yesterday it put out an update saying trading would be at the top end of the expectations it only recently upgraded. The group lifted UK box office revenues sevenfold during the year to £53.1m, dominated by The Twilight Saga: New Moon, which generated £29m.

The outlook for the group is also good, with the third Twilight offering scheduled for release in June and other films currently in cinemas. Films have proved resilient in the economic downturn. This company looks a decent bet to carry on growing. Buy.