The Investment Column: Credit crunch may just leave ScS sitting pretty

Bellway Homes; FW Thorpe
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The Independent Online

Our view: Hold for now

Share price: 48p (+3p)

People having worries about financial crises and credit crunches are probably not the folks that are about to rush out and buy a new sofa. And there are plenty of such people if furniture retailer ScS Upholstery's latest figures are anything to go by.

But despite the disappointing numbers – the group made a trading loss of £8.8m for the half year to 26 January and reported a fall in like-for-like sales of 15 per cent in the six monthsto 15 March – the group's chief executive, David Knight, is upbeat and believes that the company will return to profitability in the second half of 2008.

That will be a tall order, especially as most reckon that the economy will get worse before it gets better, but investors, particularly those that are prepared for a long-term punt, should not necessarily dismiss the group out of hand.

True, even the company's house broker, KBC Peel Hunt, disagrees with Knight and does not think the company will be profitable by the second half of this year, "We have a negative view on the outlook for the consumer economy and consequently have applied bearish assumptions to our forecasts leading to our downgrade ... to breakeven this year and next," they say.

Other watchers at Panmure Gordon point out that even if the second six months are profitable, it will not make up for the hammering the group got in the first half year.

But there are reasons to be cheerful. The numbers announced yesterday do not include the Easter trading figures, which the company says are up on last year. Knight and his management team have reacted to the economic woes by cutting costs. They are also returning to what they say ther company knows best: aggressive campaigns highlighting bargains.

And in the long run the credit crunch could actually be good news. While 2008, and possibly beyond, will be tough for ScS, nobody thinks the group will go out of business. But the same cannot be said for the thousands of local retailers that make up the most of the rest of the retail furniture industry. It just might be that ScS emerges from the credit crisis with a bigger market share than its present 5 per cent and in a position to make lots of money. Hold for now.

Bellway Homes

Our view: Cautious hold

Share price: 789p (-21p)

You probably will not find too many people suggesting that banks and building societies should be offering cheaper mortgages to first-time buyers and those with a dodgy credit history.

But that is exactly what Alistair Leitch is arguing for. He is the finance director of Bellway Homes, a builder that targets the group, which in the United States is now famously known as sub-prime.

The credit crisis, as Leitch points out, is hitting house builders hard. "People are asking about the cost of their mortgage and the value of their house, and coming to the conclusion: why am I moving?" he says. If the downturn gets worse, the group is likely to suffer. It sells houses to those that can afford them least, and the banks are not doing anything to help. Leitch himself points out that some lenders are insisting that buyers cough up at least 30 per cent of the cost of a house.

So you would think that the analysts would be queuing up say, sell. Not so. Even though the group had a poor six months to 14 March, it has outperformed the market. Bellway sales are down 9 per cent in the period versus a sector wide average drop of 20 per cent.

The rest of the year will be heavy going for Bellway and those investors that do not like the property sector should steer well clear of the company and every other house builder. But those that want exposure to the property market should probably look no further. Cautious hold.

FW Thorpe

Our view: Hold

Share price: 510.5p (+28p)

The last thing a lighting equipment company needs is a power cut. Luckily for FW Thorpe yesterday's outage, which coincided with the announcement of their half-yearly results, only lasted for about half an hour.

The figures were encouraging with a 26 per cent rise in pre-tax profits to £4.5m, but like many companies, it is the credit crunch that investors must fear.

The company owns several lighting equipment groups that make fittings and switches. According to Peter Mason, the company's financial director and joint chief executive, its manufacturing clients are not reporting any difficulties, but its retailers are beginning to feel the squeeze. "Some of our retailer clients have cut their spending plans," he says. "Others have just tried to stop spending completely."

However, buyers should be buoyed by the fact that the company is undertaking new projects to improve the energy efficiency of the group's products.

The credit crunch will undoubtedly dent the company, despite Mr Mason's cautious optimism, but the group remains in good health and should not frighten buyers. Hold.

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