Home Retail Group has many merits sorely lacking in its sector: a strong balance sheet, superb cash-generation and a secure dividend. But, as its name lets slip, the FTSE 100 owner of Homebase and Argos is also badly exposed to a falling housing market from which it is hard to hide. Its shares have halved in the space of a year.

Yesterday’s first-half figures were predictably bad. Not least for the £542 million goodwill write-off on the value of Homebase – the first impairment since demerger from GUS two years ago – which pushed the group into a £437 million pretax loss. Operating profits were down 14 per cent at Argos but an uncomfortable 37 per cent at Homebase. Current trading has worsened at both chains, with like-for-like declines in sales weakening from 6 per cent in late August to “high single digits” in subsequent weeks, indicating that the traditionally more resilient Argos is now suffering, too. The upshot is that, should present trading patterns persist, pretax profits will be at the bottom end of the forecast range: about £327 million. There might be some comfort that Argos’s worst weeks coincided with those periods in the past month when Britain’s banking system was under the severest strain and dominating daily news bulletins, which gives modest grounds for optimism should that have proved the height of the storm.

Less reassuring is the fact that, echoing recent dire data from the likes of John Lewis, consumers appear to have reined in spending on all items, from homewares to electricals, big ticket to small.

With house prices expected to continue to fall next year, there is no immediate sign of relief. The strengthening of the US dollar to a five-year high against sterling 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 about £5 million. For its part, Home Retail is tightening its belt, cutting capital expenditure from £225 million to less than £175 million.

At 196¾p, Home Retail trades at less than eight times 2009 earnings and yields nearly 8 per cent – a tempting valuation for a company with £275 million of cash, £100 million of it generated in the past six months alone. However, with the company facing a combination of falling sales and falling margins next year – raising the possibility that the payout may not be preserved for ever – first-time buyers should await a better price.

Provident Financial

It should come as no surprise that Provident Financial is coping well with the credit crunch. The doorstep lender’s clients are accustomed to straitened times and its agents are among the most adept of lenders at avoiding bad debtors.

The fact that the Provvy underwrites almost all of its loans face-to-face and collects repayments in person every week puts it at an advantage when the economic outlook is changing so rapidly, allowing it to change its terms to suit the times. Because most of Provident Financial’s customers do not have access to credit, few have built up large personal debts. Similarly, the fact that only a minority own their own homes means that it is largely unaffected by the housing market downturn.

That leaves two key dangers for the company. First, the temptation to speed up the growth of its Vanquis Bank credit card book. With mainstream banks clamping down on lending to people on low incomes or with impaired credit histories, the card’s growth prospects are huge. So far Provident Financial has remained selective (it declines 80 per cent of applications) and it must remain so, particularly before the Christmas period, when demand for its services will be high. Secondly, the economy could worsen to the point where even its usually impervious customers begin to be affected – in which case, even the most stringent underwriting will not save it from rising impairments. Yesterday’s third-quarter update shows both arrears and impairment levels broadly unchanged.

At 761½p, or 9.5 times 2009 estimates and yielding 8.4 per cent, Provident Financial has outperformed the FTSE all-share by 50 per cent over the past 12 months. With earnings set to grow in double digits, there is every reason to hold on.

Davis Service Group

Dirty laundry is Davis Service Group’s business. So it was perhaps only to have been expected that the mid-cap support services company was quick to own up to a downturn in trading in its profit warning in August. Davis, which owns Sunlight in the UK and Berendsen in Scandinavia, spoke of lower demand for its linen, uniforms and laundry services from German hospitals and British hotels and its shares fell by 16 per cent.

There was relief, then, that the third-quarter trading update yesterday contained no further bad news. British hotel occupancy levels, and hence linen volumes, have continued to deteriorate but are no worse than expected. Meanwhile, falling oil prices have meant that energy cost inflation – a key item for Davis – is proving less than expected. In the Nordic region, which accounts for about 30 per cent of sales, underlying revenues continue to grow at about 6 per cent, with the adverse effect on margins of this year’s increase in sales and marketing staff starting to dissipate. On the Continent, Poland and the Netherlands are performing well. Germany is still difficult, although it should produce a modest operating profit. Davis’s net debt – forecast at £446 million for the year end, greater than its present stock market value – induces caution, as does a potentially worsening outlook for 2009. However, at 234½p, or less than six times next year’s earnings, and the 8.4 per cent yield safe for now, much of that gloom is priced in. Hold.

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