View from City Road: MFI could yet furnish a good buy

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The Independent Online
IT HAS been a cruel blow for the managers of MFI and their venture capital backers. The flotation of the furniture group, which should have been a high-priced mahogany affair, has turned to laminated chipboard.

The brokers eventually placed the shares with institutions yesterday and found sub-underwriters for the public offer, but only at the miserable price of 115p. A month ago 150p seemed possible. Such are the vagaries of the stock market.

The executive directors, led by Derek Hunt, will now receive about pounds 3m in shares rather than the pounds 21-30m they would have received if the price had been in the 135-145p range. Still, the pounds 10m cash bonus is still intact and should help to console them. The venture capitalists, who include CINVen, Charterhouse and Ivory & Sime, have less to be pleased about. They are now looking at a tiny return on their investment.

Small investors now have to decide whether to take up any of the 137 million shares on offer to the public. Immediate stock market jitters aside - and on all but the most gloomy predictions for the British economy - the shares look attractive. They stand on 15.3 times pro forma earnings. This comes down to 12 on prospective pre-tax profits of pounds 85m for the year to next April.

However, the notional gross yield is an unexciting 4.35 per cent. And the notional dividend cover is only twice, but fast earnings recovery should rebuild this while allowing real dividend growth.

Mr Hunt and his colleagues have done an excellent job in maintaining operating profits despite the worst housing market in living memory. MFI, with 10 per cent market share, is by far the largest survivor. That kind of muscle must be worth something.

There are worries. The current trading statement is ambiguous. Readers between the lines might conclude that sales are particularly dire. Some analysts wonder how much more efficiency gain the managers can squeeze from an already well-wrung business. Stock levels have already been savagely cut and products manufactured in-house account for 60 per cent of sales.

This may not be a good time to put fresh money into the UK stock market. But it looks an excellent opportunity to switch from other so-called recovery stocks, especially some fashion retailers which are less well run yet sit on far higher multiples.

(Photograph omitted)