The Investment Column : Allied Carpets set to roll out successful float

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The Independent Online
It looks like a hat trick of successful stock market flotations for the larger specialist furnishings groups.

First there was Sir Phil Harris with Carpetright, then along came Sir Graham Kirkham and DFS Furniture and now, all going well, there is Allied Carpets. No doubt Allied's managing director, plain old Ray Nethercott, has left a date in his diary for an appointment with Her Majesty. He should be able to afford a decent top hat and tails as the flotation makes him a millionaire three times over even after a last-minute scaling back of expectations.

Yesterday Allied bowed to recent stock market turbulence by announcing a flotation price of 215p, valuing the group at just over pounds 189m. That's at the lower end of 205p-235p range set out in the prospectus but given choppy market conditions Allied and its advisers must be pleased with their efforts.

True, the response to the intermediaries retail offer was disappointing, with only 11.9 per cent of the shares taken up. In addition, superstore Asda is selling its entire 41 per cent holding to raise pounds 65m.

But significantly, CinVen, the venture capitalist group that organised the 1991 buyout from Lowndes Queensway, is only cutting its stake from 13.2 per cent to 10 per cent, instead of the 5 per cent indicated in the offer document.

CinVen and the institutional investors who signed up may be on to something. At the offer price, Allied stands on a prospective p/e multiple of 13 times, substantially below the high-teens rating Carpetright commands. The lack of a track record helps explain the discount but there are plenty of reasons to believe that gap will narrow.

While Allied's operating margin of 6.3 per cent is half that of Carpetright, that reflects a different sales mix and market positioning plus the two companies' different stages of development.

Allied has 12 per cent of the carpet market, just ahead of Carpetright. It should be able to pinch market share from the independents, who still control 58 per cent of the market, with a target store-opening programme of 20 a year, mainly the flagship Allied chain. Like the independents, Allied is targeting the mid-upper end of the market while Carpetright has so far focused on the price-driven lower end of the market.

Allied is also operationally geared to higher sales with a very modern and efficient warehousing operation in Bolton. Each additional 1 per cent on sales adds almost 6 per cent to earnings per share compared with 3.2 per cent at Carpetright. The market is also set to grow as the number of housing transactions increases.

Some analysts have pencilled in compound growth of at least 40 per cent over the next three years and think the shares could hit 300p by next summer. This one looks priced to go.