THE INVESTMENT COLUMN : McCarthy lives again

McCarthy & Stone, the retirement housebuilder, looks to be in ruder health than some of its customers after a long period in the recession when it appeared to be on the brink of extinction.

First-half pre-tax profits of £1.3m on sales of £25.1m compared with a loss last year of £400,000 even after £1.5m of disposal profits.

It follows four consecutive years of losses in the early 1990s, notching up more than £60m of red ink.

The corner was turned a year ago, when a £15m rights issue put the company back on an even keel. The fact that McCarthy needed to expand its land bank indicated that the worst was over.

Compared with other housebuilders, McCarthy has had a much easier time of it over the past year when intense competition for land has driven prices to silly levels, putting margins under pressure.

Because the company focuses on town centre sites close to shops and other amenities it does not have to compete with the likes of Barratt and Tarmac in their scramble for the sites remaining in the leafy suburbs. Most of its land had previous uses - old schools and hospitals, even bus garages and electricity sub-stations - and there is little competition for acquiring it.

Despite a 2 per cent fall in average selling price from £64,500 to £63,000, gross profit margins increased from 28 to 33 per cent as lower land and building costs fed through to finished stock, replacing older higher- cost units.

The key, looking ahead, is for McCarthy to continue pushing through volumes to soak up the rapid increase in production. At the end of February, 919 units were under construction compared with 593 a year earlier. Construction starts were running 29 per cent ahead of the first half of last year.

Whether it can achieve sufficient sales with the second-hand market remaining subdued is debatable. Most of its customers need to sell large family houses to trade down to a retirement flat.

That is one worry. Another is the threat that volume builders, many of whom pulled out of the retirement game when trading got tough in the housing slump, will return to the fray if McCarthy's margins start to look too attractive.

Having said that, on forecast profits of £7m this year and £10m next time, the shares, 3p higher at 59p yesterday, stand on a forward price- earnings ratio of just 12 falling to 9. McCarthy's return to health looks to have a way to run yet.