The Investment Column: Carpet distributor Headlam floored by downturn
Goals Soccer Centres; RCG Holdings
Tuesday 02 September 2008
Our view: Avoid
Shares: 294.5p (-39p)
Be warned. Admen are fine-tuning the jingles ready for an advertising campaign urging you to love your carpet. It is the industry's response to a worrying and steep slump in sales.
Headlam, a leading distributor of carpets and other floor coverings such as vinyl and laminates, fell 12 per cent yesterday after warning it might not meet its sales and profit targets for the year.
The news should not come as a surprise. Sales of carpets and other household goods have always been dragged lower when there is a slowdown in the housing market. But in the past consumers unable to move have been tempted to splash out on new fittings for the home while they wait for the recovery in the market. This time, families are cash-strapped by rising food and utility bills and soaring fuel costs, so a consolation prize of a new carpet for the lounge will have to wait.
After a flat first half to June with profits up just 1.7 per cent and sales 6.6 per cent, Headlam says conditions have become "increasingly demanding" as it approaches one of the key shopping periods of the year. So its own internal forecasts now look doubtful as it trusts that the industry's combined marketing efforts to revitalise sales will do the trick.
Headlam is by no means one of the worst sufferers. Carpetright, one of the country's leading carpet retailers, last month reported a thumping 15.4 per cent drop in sales and drew uncomfortable parallels with conditions now and those of the economic crisis of 1974.
While Headlam's performance has been dragged down by residential sales, its growing business supplying floor coverings to the commercial sector – offices, shops and schools – is proving more resilient. Even so, there are too many uncertainties to recommend the shares at present. Avoid.
Goals Soccer Centres
Our view: Buy
Shares: 222p (-18p)
Goals Soccer Centres earns fees from five-a-side teams using its synthetic floodlit pitches. About 300,000 competitive games were played last year.
The company claims to be as near recession-proof as it is possible to be in the leisure sector. Even in tight financial times players can afford a few quid for a game even if spending on other services such as coaching has dropped off.
Sales in the first half increased 4 per cent on a like-for-like basis, with profits before tax of £3.7m, up 20 per cent. There are 29 modern football centres and Goals says there is scope for another 150. It will open six in 2009 and increase the rate of opening from then on. There are adequate banking facilities.
The growth rate is impressive, but the centres fall well short of full utilisation. The challenge is to attract extra incremental business. It has organised football parties for youngsters, but the financial crunch is making it difficult to generate sustained income from this source.
The five-a-side game is catching on abroad. Goals is involved in a joint venture to open a pilot centre in Los Angeles and plans to expand in South Africa, which hosts the 2010 World Cup.
The broker WH Ireland remains a fan of the shares, although it felt profit growth during the half fell short of forecasts. As a result it is reducing its own estimates for the next two years.
In February, we thought the shares were fairly valued at 330p. They are now back to 222p and selling on just over 15 times earnings, where they look more attractive. Buy.
Our view: Hold
Shares: 65.25p (up 3.25p)
Based in Hong Kong, RCG Holdings has developed fingerprint and facial-recognition software providing advanced levels of security. Growth has been impressive, driven by new products rapidly embraced in China and South-east Asia, where there appears to be less concern over possible infringement of personal liberties than there would be in the West.
First-half profits rose two thirds to £20m and the full year seems to be on track for the £41m forecast by the house broker, Investec. RCG, listed on AIM, is well placed to benefit from the global development and gradual fusion of biometric and radio frequency identification technology, which is growing at 40 per cent a year and is expected to generate sales of $25bn by 2012. RCG is a tiddler, but is punching well above its weight, helped by a variety of joint ventures, partnerships and acquisitions. Growth is from both the private and corporate market.
People living in expensive apartments are ordering sophisticated security screening systems, while banks are using facial-recognition devices to monitor movement of staff and customers. Other systems have been targeted at organisers of large events to detect counterfeit tickets.
In its latest venture, RCG has teamed up with Acer, one of the leading sellers of PCs, enabling a laptop user to gain immediate access through recognition by a web camera.
The death last year of Nina Wang, one of the richest women in Asia, cast a damper over the shares. She controlled Veron International, which owns 27 per cent of RCG. There are fears that whoever inherits the Wang fortune may dump the stock. But the 40 per cent fall has probably been overdone.
Plans for a dual listing on the Hong Kong Stock Exchange should attract new investors. Investec sees the shares hitting 137p. Hold.
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