The Investment Column: Beazer exposed to downturn

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The Independent Online
Beazer, the UK's third-biggest housebuilder, has come a long way since floating free from Hanson in March 1994. House completions since then have jumped just over a third to hit 7,177 in the year to June, while operating profits have grown by nearly a half to pounds 65.4m. Sadly, the shares have not kept pace, rising from a placing price of 165p to just 185.5p, up 3p yesterday.

In part, this sluggishness reflects the company's own success. Yesterday it reported a 34 per cent rise in pre-tax profits to pounds 62.2m for the year to June, boosted by a 20 per cent increase in completions and a 17 per cent rise in the average price to pounds 74,500. Beazer is very much a national housebuilder, with 16 regional operations in the main business and three working under the banner of Charles Church, the upmarket Home Counties builder acquired last year for pounds 35.7m. It is difficult to see where Beazer goes from here.

Dennis Webb, chief executive, believes there is no reason past success cannot be repeated. But there seems little room for manoeuvre on margins. Although there is some ground to be made up, Beazer's returns are already among the best in the industry, while labour and other costs are going the wrong way.

That leaves Beazer primarily dependent on volume for growth. Mr Webb believes there is the potential to lift completions to 800 units per regional operation, giving a theoretical total of nearly 14,000 a year. That is close to double what Wimpey believes is manageable, while the increasingly costly land bank is down to under three year's output. Add in the increasing importance of the booming South-east and Beazer could be dangerously exposed in a downturn.

The group is attempting to move upmarket, with Charles Church opening up in Solihull. But even if profits hit pounds 72m this year, putting the shares on a lowly forward p/e ratio of 11, this is not one to chase.

McBride, the shampoo and washing powder maker, is emerging from a rotten period. Floated at 188p two years ago, the group's shares dived almost immediately after a humid summer filled its detergent factories with bubbles and prices of essentials like polymers and cardboard packaging soared. But business is returning to normal, reflected in full-year figures to June showing profits up 41 per cent to pounds 29.1m.

Excluding currency, which lopped pounds 25m off total sales, turnover in the group's core personal care and household products business grew 6.6 per cent, almost double the market's rate of growth. Margins are also recovering.

Though the supermarkets remain tough on price, McBride says that big suppliers which can make products of equal or better quality to the brands have some negotiating clout. If McBride can make a washing powder as good as Persil or Ariel at removing stains, customers will switch to the supermarket brand and Tesco or Sainsbury saves a small fortune on promotion. This means McBride has to maintain a high spend on development, while keeping its other costs under control.

NatWest has raised next year's profits forecast by pounds 1.5m to pounds 33m, so the shares, unchanged at 170p, stand on a forward p/e ratio of 12. Good value, especially as Wassall, which recently bought a 2.98 per cent stake, is openly hunting for a way to spend its pounds 500m cash pile.