The Investment Column: Carpetright floored by retail slowdown

AG Barr; Et-China
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The Independent Online

Our view: Sell

Share price: 637.5p (-64p)

"I'm an optimist!" declares Lord Harris of Peckham, the chairman and chief executive of Carpetright.

A good job too. Investors' optimism may be falling with the stock, which has dropped by the best part of 40 per cent in the last 12 months. The problem for the company, which the boss himself acknowledges, is that the macro situation is awful.

A number of the analysts agree and advise that clients run for the hills. The company issued a short trading update yesterday affirming that the market is as difficult as it has ever been, which prompted those at Panmure Gordon to say: "It could just be that this statement coincides with our growing belief that the ramifications of events in the financial markets will be severe for the next few months' retail spending, but we believe that this statement, while saying precisely nothing new, should lead to analysts that are at or above pre-tax profit consensus for the year of £46m to get their red pens out. We are on £40m and are moving the shares from hold to sell."

However, investors might not give up entirely on the group. There is a body of opinion that suggests that in a downturn, people improve their existing houses rather than move. Given that the average spend at Carpetright is between £100 and £300, Lord Harris believes the group will bounce back as soon as economic health returns, in about 12 to 18 months, he says.

However, that may be scant consolation for investors who buy now. The problem is that things are tough now, watchers at Kaupthing reckon, "We have a price target of 570p... on the basis that it was trading on a price earnings ratio of 14.4 times or 7.8 times enterprise value to Ebitda." Sell.

AG Barr

Our view: Hold

Share price: 1003p (-94p)

It is said in Scotland that Irn-Bru is a more popular soft drink than coca-cola, which may well be true, and in commercial terms, the drink's popularity is doing AG Barr no harm at all.

The group issued its interim results yesterday showing a 9.8 per cent hike in pre-tax profits to £11.1m (albeit against another bad summer in terms of weather), while the company has also been able to keep its margin in check, despite ever increasing input costs.

Indeed, all the evidence points to the fact that the company is in rude health. Even the outlook bit of the statement is upbeat, with the group saying it is on track to meet its full-year target.

However, despite all this good news, investors would be wise to think twice about buying the shares. The Investment Column last looked at the company at the start of April when we said that readers should buy the shares at 1165p, believing that the good news would push the stock north. Despite there being little change in the news flow the shares have fallen, including by a drop of 8.6 per cent yesterday.

Analysts at Investec argue that: "We also leave our target price at 1300p, despite market conditions; this represents 1.5-2 points enterprise value to Ebitda premium versus the rest of the sector, supported by the group's branded nature and good track record of delivery." Buying anything at a premium is risky, especially when the group's stock has dropped from 1195p to its current level in just two weeks. That is largely due to what has happened in the wider market, but investors need to be cautious. Hold.


Our view: Buy

Share price: 78p (-23.5p)

Bad news is like London buses, with lots of it seemingly coming all at once for Et-China, a travel company that specialises in providing flights, hotels and tours in southern China.

According to every sage, China is booming, ergo, a company like Et-China should be doing likewise. Well, not quite. The group published its interim results yesterday, which showed that pre-tax loses had widened to RMB19.9m (£1.58m), from RMB19m last year. Not a great deficit, granted, but analysts at house broker Investec say that while the group should be profitable in the second half of the year, the amount will not be as high as previously thought. Severe weather, the earthquake in Sichuan and heightened security measures for the Beijing Olympics all hindered the group.

However, these are largely one-off factors and the company is fundamentally heading in the right direction. The Chinese government are extending the list of places its citizens can travel too (including recently the US), the drop in demand seen in Europe for air travel has not materialised in China and the group's revenues are soaring.

There are other risks of course, the Aim market is volatile and some very good companies are being punished by investors for no good reason, but Et-China is a strong player in what is a market that has the potential to boom. Buyers should be cautious, but with the stock falling a massive 23.2 per cent yesterday, now might just be the time to buy. Buy.