Home Retail has many merits sorely lacking in its sector: a strong balance sheet, healthy cash generation and a secure dividend. But as its name betrays, the FTSE 100 owner of Homebase and Argos is also badly exposed to a falling housing market from which there is little escape — and which has done much to halve its shares in the space of a year.

Today’s first-half figures were predictably bad — not least for the £543 million goodwill write-off on the value of Homebase. which pulled the group into a £437 million pre-tax loss. Operating profits were down 14 per cent at Argos but a hefty 37 per cent at Homebase. Current trading has worsened, with like-for-like sales declines in “high single digits” over the last two months indicating that the traditionally more resilient Argos is now suffering too. The upshot is that, should current trading patterns persist, pre-tax profits will be at the bottom end of the forecast range: some £327 million.

With UK house prices expected to continue to fall next year, there is no immediate sign of respite. The recent strengthening of the US dollar provides Homebase with a further headache, given its sourcing of goods from the dollar-linked economies of Asia: every 1 cent rise in the US currency increases its buying costs by around £5 million.

At 194p, Home Retail trades at 7.6 times 2009 earnings and yields 7.6 per cent. That is a tempting valuation for long-term investors. However, the risk of further cuts to profit forecasts suggests there will be better days to buy.

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