DUST has been gathering on the HBOS file marked “Abbey National takeover” for exactly two months. City memories are often short, but the speed with which the Abbey takeover plan has receded into the annals of history is quick, even by stock market standards. It is odd to think, however, that if HBOS had made a different Abbey decision back in September, bid talk would be centre stage today. Far from fading in the memory, the process — probably — would be still grinding through the early stages of a long, tortuous takeover process.
“What are the chances the regulators will let you through?” investors would have asked. “Can you let us know the scale of synergies you are targeting?”; “How determined are you to outbid Banco Santander?”; “Who will run the show?” James Crosby and his team of senior executives in HBOS would have given non-committal replies. HBOS might have tried to tell investors about the strong underlying trading of which it did speak yesterday — assuming, that is, that HBOS had managed to keep enough of its attention on the existing business to make the promising noises. But it would have been a struggle. HBOS would also be looking at another six months of diversions with no certainty that it would either win the battle or that the battle would be worth winning.
Investors showed their appreciation of HBOS’s decision to walk away from Abbey by marking its shares up from 700p to 780p during September. Investors showed renewed enthusiasm yesterday, with the stock rising from 786p to 806p. Blissfully bereft of bid distractions, investors enjoyed news that HBOS is growing its assets base at 10 per cent a year, while adding operating costs at under 5 per cent and enjoying wider interest rate margins. Overall, HBOS is cautiously optimistic.
All this should translate into good profit growth and a determination to increase shareholder returns through share buybacks and a commitment to increase dividends in line with earnings. As long as the economy keeps itself on an even keel, HBOS investors can look forward to double-digit increases in dividends.
Housing market and other credit-quality risks remain for HBOS. However, with its shares offering a 4.5 per cent yield, those are risks worth taking on. Buy.
Carpetright
THE UNFORTUNATE demise of Courts, the furnishings retailer, is enough to make anyone nervous about investing in Carpetright. The two outfits operate in pretty similar markets, don’t they? The fact that the housing market is cooling adds to the concerns because people buy new carpets when they move house. Or do they? It would be a big mistake to assume that Carpetright has anything in common with Courts. Far from heralding trouble for Carpetright, indeed, the collapse of Courts presents it with an opportunity to improve market share by pinching some of the carpet revenues from its troubled rival.
Meanwhile, it is easy to overstate the influence of the housing market on the Carpetright business. The average single purchase sets consumers back between £150 and £300. If house prices are falling consumers might think twice about spending this sort of cash, but the need to replace worn-out carpet means that sales can be expected irrespective of wider housing market or economic conditions.
The more substantial challenge for Carpetright is to continue cranking out growth in a market with little or no inherent growth in it. Since it has a 26 per cent share of that market, the task is even tougher. But by exploring multiple routes to markets — including the conventional large outlets and small format stores, department store concessions and home shopping services — Carpetright has delivered, and should continue to deliver, good growth. Although it has a 26 per cent share of the UK market, 50 per cent of the total is handled by independent operators which can be targeted by Carpetright. The larger Carpetright grows, moreover, the wider the margins go, too, since there are economies of scale in sourcing product.
Nascent positions in northern Europe add to the growth profile. Carpetright has a nice sideline supplying carpet to insurers who replace floor coverings for claimants directly after an old carpet is damaged.
Carpetright reckons that it might be able to double profits by 2008. It is a brave boast, but one that is achievable. Buy.
iSoft
ISOFT’S focus on selling software to healthcare providers has always served it well. It has enabled it to take advantage of growing spending by the NHS while enjoying relatively few pressures from swings in demand in the wider technology market or as a result of changes in the overall economy. The company has also proved its ability to win business in the UK. It has taken three of five regional contracts to implement patient record systems in the NHS.
Those contracts provide a base for future revenues, but growth opportunities in the UK remain limited. The company has been trying to tackle that with moves to expand internationally. The acquisition in 2003 of rival Torex gave it a base in Europe. It already has operations in Asia, giving capability to take advantage of foreign healthcare providers’ inclination to look west for guidance on IT spending.
Tim Whiston, iSoft’s chief executive, is confident that he can win more new business abroad on the back of the reputation it has earned itself in England. To judge by yesterday’s reaction to interim results reported by the company, however, investors are not so sure. The decision by John Whelan to step down as finance director is also unsettling. Investors were assured that Mr Whelan is simply pursuing long-held ambitions to work in the private equity arena.
Since he had been in the job for less than a year, however, the market seems to want reassurance that there is no other story behind the departure. Hopefully this assurance will come quickly but until the air clears the shares may sit in the shade. Sell.
