The Investment Column: Travis Perkins is robust enough to cope with slowdown

Ideal Shopping Direct; Davenham
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The Independent Online

Our view: Hold

Share price: 1079p (+9p)

Travis Perkins sells over £3bn of building products a year, from bricks and timber to roofs, tiles, and plumbing. So there is nowhere to hide when Britain's housebuilding trade goes into hibernation. The shares are 46 per cent down on the year on concerns over the housing slowdown. As it happened, 2007 wasn't as bad as feared for the company, but the stock market was clearly taking no chances.

There were lots of comparisons bandied around about whether this year would follow the path of the severe housing recession of the early 1990s or lapse into a gentle decline like 2005. Travis, understandably, was more confident of a 2005-style slowdown.

The two parts of the business are already diverging. The building merchants' outlets, servicing the small jobbing builder carrying out repairs and maintenance work, and which generates 80 per cent of total profits, is proving the more resilient. Sales in the first two months of the current year are up by a respectable 5.7 per cent.

At Wickes, the retail home improvements arm, it is a different story. Sales are up just 0.9 per cent as homeowners defer more costly purchases such as kitchens and bathrooms. However, the overall position is more bleak than it seems, with total sales down between 3 and 4 per cent compared with the last quarter of 2007.

Travis, which operates 1,166 stores, is financially robust, so more challenging trading conditions could throw up opportunities for taking out smaller rivals. The only worry is that competition could intensify on the building merchants side, the one area of the trade showing signs of growth.

Travis finished last year with profits up 18 per cent at £261m, better than expected, as it took around two points in market share from rivals. That should continue in the stagnant conditions anticipated for the current year. At just over 7 times expected earnings, the shares look cheap, but any early appreciation in value in current conditions is unlikely. Hold.

Ideal Shopping Direct

Our view: Good value

Share price: 239p (+3p)

TV shopping channels are coming of age. No longer targeted solely at bored housewives, they are attracting wider if still predominantly older audiences and becoming a growing force in retailing. Penetration will increase as more homes have digital television.

Ideal Shopping Direct is number three in the UK pecking order, and close to turning over £100m of merchandise, ranging from jewellery and footwear to health, beauty and craft products, through three channels broadcast from its production and warehouse base at Peterborough.

While some critics may cringe at the presenting skills on certain shopping programmes, there is a highly professional approach behind the scenes, as audience reactions are quickly monitored to identify fast-selling products and drop slow lines.

While sales increased 14 per cent last year to £97m, pre-tax profits came in 6 per cent lower at £5.8m after restructuring costs.

The main broadcast platform for Ideal is Freeview. Ideal has secured its slot to 2018 on what are seen as favourable terms.

Ideal shows 20,000 products a year, while programme scheduling is widening to include kitchens, cruises and Spanish villas. Around 20 per cent of goods are own brand, but that is expected to increase.

Ideal received a bid approach in January, most likely from one of the two larger players in the sector. Even if bid talks end inconclusively, the shares on 12 times expected earnings are well supported by underlying trade, sales up 6.4 per cent in a market growing between 5-7 per cent, and a host of initiatives, including a tie-up with BT Vision to show clips of Ideal shows to subscribers. Good value.

Davenham

Our view: Hold

Share price: 166.5p (+ 5p)

Davenham operates in the foothills of the commercial lending market, so no surprise its share price was flattened by the credit crisis landslide. Davenham offers loans of between £10,000 and £5m to small and medium-sized firms. Although creditworthy, they were shown the door by the banks because they were too small, too new, or wanted too much money. This is where Davenham steps in, typically charging an APR of some 18 per cent, twice what banks would charge, but acceptable for firms in need of short-term bridging finance.

Davenham delivered a solid first-half performance, with profits up 12 per cent at £5.8m. The loan portfolio was up 35 per cent at £289m. The market breathed a sigh of relief, there were no bad debt surprises.

The company's own funding arrangements – £300m, of which two thirds has been drawn down – are intact until December 2009. The tougher stance being taken by mainstream lenders to borrowers is likely to steer more business Davenham's way.

A bid of 325p a share from asset manager ACP Capital floundered in January. The shares are not expensive on 4.4 times expected earnings, but little excitement is likely on the trading front. Hold.

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