The Investment Column: Barratt hopes for thaw in freezing housing market

Portland Gas; Inchcape
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The Independent Online

Our view: Hold

Share price: 399p (+36.25p)

The housing market has gone into deep freeze, decimating shares of leading builders. But perhaps a thaw is under way. Barratt Developments, whose shares have been the weakest in the sector, rallied yesterday.

A promising trading state-ment did the trick. The firm traded satisfactorily in the six months to December, with selling prices holding up. The market is taking its normal mid-winter breather and the real crunch will come in the spring when buyers should be stomping all over Barratt sites and slapping deposits on new homes. But that will require a big improvement in sentiment helped by cuts in interest rates – preferably a couple.

Property jitters have wiped 65 per cent off Barratt shares over the past six months. It is considered one of the more vulnerable companies in the sector. It paid top dollar for rival Wilson Bowden and has a higher proportion of buy-to-let properties and flats than its competitors. Its borrowings are also high.

However, Barratt does have a valuable land bank providing work for well over five years. Some analysts say the plots could be worth another 200p a share on top of the present price.

In the medium term, the challenge will be lifting selling prices, even if volumes suffer. The company believes it can earn margins of 16-17 per cent, slightly below last time, but that target could come under pressure if it is forced to offer more generous incentives to encourage buyers.

Latest figures show average prices fell just under 1 per cent to £177,900. The total number of completions taking in the Wilson Bowden acquisition fell 15 per cent to 9,056. That could fall again this year. The current order book is 6 per cent down at £1.26bn.

Brokers believe profits for 2009 will slip from £430m to £375m, putting the shares on five times expected earnings. That is cheap but buyers would be wiser to hold off until the spring when clearer evidence emerges of housing sales. Hold.

Portland Gas

Our view: Highly speculative

Share price: 264p (+19p)

Anyone familiar with the Jurassic coast of Dorset knows it is an area of outstanding natural beauty. Try to put up a bird table in the garden and there will be a riot in the village.

So proposals to store natural gas in vast underground craters and then pipe it to the local National Grid are, to put it mildly, somewhat controversial. But that is what is planned by Portland Gas, which began trading on AIM yesterday after being demerged from the exploration outfit Egdon Resources.

One broker suggested Portland shares could double in a year. But that requires a big if. First, Portland has to obtain a series of planning approvals for its scheme to create 14 underground storage caverns beneath the Isle of Portland capable of holding 35 billion cubic feet of natural gas – or 1 per cent of the country's annual needs.

The project will cost £500m and would need outside partners, probably a gas supplier, to help with the financing. Portland plans a similar but smaller storage centre at the Larne Lough in Northern Ireland.

The economic case seems convincing. The UK is now a net importer of gas and badly needs somewhere to store it. Holding large reserves can help cushion the impact of price fluctuations.

Portland, with no visible earnings and £4m of cash, is valued by the market at £160m. The shares will jump if planning permission is given – a decision is due soon. Refusal will scupper the price. Highly speculative.

Inchcape

Our view: Buy

Share price: 344p (+5.25p)

It sounds like somewhere Arthur Daley could only dream about. Imagine a place where demand for cars is so insatiable they hardly need selling, where discounts to buyers are unheard of, and where financing deals are in abundance. It is a long way from Arfur's west London forecourt but that is the state of the new car market in Russia, according to a study by brokers at HSBC.

Why should we be concerned? Because a British company is fast creating a big and profitable business in Russia just as the UK market gets tougher and margins slimmer.

The company is Inchcape and it is attacking emerging markets such as Russia where sales, particularly of foreign brands, are growing at up to 40 per cent a year. More affluent buyers want the sort of up-market cars which Inchcape provides.

Contrast that with the UK where sales grew at 2.5 per cent last year. That modest improvement is largely down to attractive finance deals offered by manufacturers to support sales. Inchcape has been shifting away from the more competitive volume end of the car market in the UK. But brokers soon expect the UK to contribute less than a quarter of group profits.

The new international flavour to Inchcape has yet to be reflected in the shares, down 42 per cent over the past year, weighed down by worries over the health of the domestic market which is beginning to matter less and less. Buy.

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