Stick with Carpetright

Redrow houses a tasty bargain; Avesco won't make you a millionaire

Stephen Foley
Wednesday 18 December 2002 01:00

Will a fall-off in the housing market pull the rug out from underneath Carpetright, Britain's biggest carpet retailer? Not according to Lord Harris of Peckham, Carpetright's chairman and industry veteran. He claims that in his 45 years in carpets, his businesses have fared well in fallow times for house prices as more people stay put and do up their existing homes.

That might seem over-optimistic but there are still good reasons for holding on to Carpetright shares. One is the dividend yield, which gives a yield of more than 6 per cent and is not under threat. Another is strong cash flow, while a third is falling capital expenditure as the company is just completing an overhaul of its stores.

The worry is a dip in sales. Like-for-like sales in six weeks to 14 December are up only 1.5 per cent on last year. That is a slowdown from the 5.1 per cent achieved in the six months to 2 November. But the company says that sales in the last two weeks are up by double digits, so the situation is still in flux and the apparent slowdown is partly down to tough comparisons last year.

There is certainly nothing wrong with the bottom line number. Pre-tax profits for the half year were up 16 per cent to £25.8m and the gross margin was up nine-tenths of a percentage point. Market share has also edged up to 24 per cent.

The Carpetland business in the Benelux countries, which was acquired for £32.5m in October made a loss of £1.6m in the four months to July as it cleared out excess stock. A third of the stores will be revamped by April. The group is processing more carpets through its expanded cutting facilities in a bid to improve margins further, and the same treatment will be applied to overseas operations.

Assuming full-year profits of £59m, the shares – up 2.5p at 580p yesterday – trade on a forward price-earnings multiple of 10. Hold on for the yield.

Redrow houses a tasty bargain

The housing market is alive and well. "Run that as your headline, that'd make a nice change," says Paul Pedley, chief executive of Redrow, the nationwide housebuilder.

Orders for Redrow's new homes are running 10 per cent ahead of this time last year, and the average selling price has risen to £145,000. No sign in yesterday's trading update of a bubble about to burst, despite the gloomy predictions from economists over the weekend.

Investors, of course, have long disbelieved talk of a "gradual slowing" in house price inflation to about the 4 or 5 per cent a year level of average earnings. But even if they are right, and Mr Pedley is wrong, it won't necessarily mean the roof falls in at Redrow. The group is one of the most diversified, with different types of developments spread across the country. Only 5 per cent of sales are in the £300,000-plus bracket that is likely to see the worst of any slowdown. It also has a strong land bank among the best margins and returns on capital in the industry.

It may seem perverse to recommend a housebuilder when there are very real risks to earnings forecasts, but at a paltry 5 times this year's earnings, the shares are simply too cheap already. Down 4p to 215p yesterday, they are a buy.

Avesco won't make you a millionaire

Avesco didn't mention Who Wants To Be A Millionaire? in its appalling results statement yesterday. The company is trying to distance itself from the quiz show format now that it has plunged in popularity in the US and profits from it (through a joint venture of which Avesco owns 49 per cent) collapsed from £3.6m a year ago to just £700,000 in the six months to 30 September.

Investors won't thank it for being so coy, since it was a big factor in the group's sliding £1.5m into the red.

Avesco mainly organises corporate presentations – product launches, conferences and the like – and hires out TV equipment. The economic climate has meant corporate business is slow, and what sales growth there has been has come at the expense of margins. There have also been disappointments in the broadcast services division, with delays to some contracts and very tough competitive pressure from the BBC.

Avesco could offer no comfort that things will improve in the second half, and it slashed its interim dividend from 5p to 2p. Even after a share price fall of 25p to 65p, investors should look for other ideas with a better risk-reward profile. Try ringing 09068 444444. Calls cost 60p a minute and you could win a million.

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