The Investment Column: Housing crisis is bad news for Taylor Wimpey
Northern Foods; Travelzest
Wednesday 16 January 2008
Our view: Hold
Share price: 159p (-13p)
Homebuyers on both sides of the Atlantic are in their bunkers. Which is grim news for Taylor Wimpey, the UK's largest housebuilder created out of last year's merger of Taylor Woodrow and George Wimpey.
It limped to the finishing line in 2007 making profits in line with expectations, according to a trading update yesterday, but it was a struggle. UK completions fell 5.8 per cent to 20,645. In the US they dipped 23 per cent to 6,740.
It is what happens next which matters. The UK housing market is deep in the doldrums. The company admits it would probably need two cuts in interest rates to trigger an early and meaningful recovery.
Selling prices, up a modest £5,000 to £190,000, will be flat this year. Margins, which it hopes to push up to 14.5 per cent, will be under pressure. The company has already been linked with reports of using strong-arm tactics on its suppliers in a bid to get them to accept cuts in payments.
New homebuyers will need to be seduced into deals. That will mean bigger and sweeter incentives that will squeeze margins. At the same time the group is facing continued steep rises in the price of raw materials – up between 3 and 4 per cent in 2007.
The US market is expected to be virtually comatose. Spain, although far less important, is also in serious trouble and the value of its land holdings is expected to be cut.
On the plus side the group's housing bank is healthy – enough for the next five and a half years – so the £1.5bn or so that it would have spent acquiring land can be tucked away or used to buy back its shares. The market expects around £500m of share purchases in 2008.
The shares sell on just 5.5 times expected earnings for 2008. That is cheap but it did not stop the price falling further yesterday. The trouble is that the whole sector is depressed and will need lower interest rates and a greater willingness to lend by the banks in time for the all important spring selling season. Hold for now.
Our view: Avoid
Share price: 85.75p (+2p)
After wiping 37 per cent off the value of the shares over the past year the market has granted Northern Foods, supplier of Goodfellas Pizzas and Fox's biscuits, a reprieve.
The price edged up nervously yesterday as dealers responded to talk that it is becoming a recovery play. It still looks early for such optimistic assumptions.
The company rewarded the market's faith by confirming that it is on course to meet expectations for last year – profits of around £47m. Sales over the important Christmas period held up well, rising 3.5 per cent. There were some strong individual performances – the chilled food side pushed up volumes 4 per cent.
However, the picture is not as clear as it looks. The improvement in sales was due entirely to price increases forced on Northern by the soaring cost of key ingredients such as wheat. Volumes were unchanged.
Customers such as Marks & Spencer were willing to pass on Northern's increases to their own customers. Official figures put food inflation running at well over 7 per cent.
At some stage, as family budgets come under increasing pressure and takings drop at the checkouts, the supermarkets are going to resist price rises by their suppliers. Firms like Northern – and Hovis bread-maker Premier Foods, which has also taken a caning recently – will be told to go back to their factories, become more efficient, and take some of the hit themselves.
That is unfair because Northern has undergone a major restructuring, reflected in a strong performance from its chilled food business and a return to profits by its bakery business. But history tells us there is no hiding place when major customers are no longer willing to absorb a supplier's price increases.
Northern boss Stefan Barden believes greater emphasis on quality will put it in a good position to negotiate price rises with retailers. Where has he been for the last 30 years? Avoid.
Our view: Hold
Share price: 98.5p (+5.5p)
Travelzest is a holiday tiddler with dreams of becoming a big fish. So far its ambitions have not been recognised on AIM, with the shares well below their 126p issue price of 2005.
But that could change. Travelzest has assembled an intriguing portfolio of holiday ventures. An online travel agency offers the usual budget priced flights and cheap accommodation. But it also serves as a useful promotional tool cross-selling holidays and adventure packages offered by the group's other specialist tour operating companies.
These are aimed at better-off travellers in search of experience rather than a tan on the beach. These are also the sort of customers affluent enough not to be put off taking holidays when times get tough – like now. So there are opportunities to visit Verona and take in best seats at the opera, or have a ringside view of a marathon in the Sahara, or even summon the nerve to join up with Peng Travel, a company well known for its naturist holidays.
A third of last year's £38m turnover was generated from its online holiday business in Canada, which is counter cyclical to the UK so earns the bulk of its profits during the winter period.
The UK side is due to get a kick start from the relaunch of its holiday.co.uk venture. Group profits for last year came in slightly ahead of forecasts at £3.2m and could rise to £4.9m this year, although it is still early in the booking season.
Travelzest is a niche operator insulated from the sharp dips which occur at the volume end of the business. The shares look cheap at just 8.7 times expected earnings, but it needs to demonstrate further solid progress before any serious re-rating is likely. Hold.
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