Carpetright rolls out an attractive future

Allied carpets, Amey, Helphire

Lord Harris of Peckham rolled out another plush set of results at his Carpetright retail empire yesterday, as profits hit record levels. The group's chains, which also include the more up-market Harris at Home and the warehouse-style Carpet Depot, have been gaining market share, with total share now standing at 20 per cent. This is double its nearest rival, Allied Carpets, so Lord Harris' target of 30 per cent of the UK carpet market certainly looks achievable.

Yesterday's figures were red-carpet material. Pre-tax profits were up 22 per cent to £44.6m, even though the number of its stores stayed virtually static at 325. The figures were helped by a 6.8 per cent increase in like-for-like sales. Current trading is even better, with underlying sales up by 9.7 per cent, though that figure doesn't look sustainable.

Gross margins were up by 3.3 percentage points, helped by stronger sales of own-brand carpets and a greater proportion of carpets being cut in house. A recently expanded cutting facility should take the proportion of in-house cutting from 70 per cent of own-brand now to about 90 by the end of this year.

Twenty-five new stores will open this year, principally in the Carpetright and Harris at Home formats.

There are two other avenues of growth. One is the £80m-a- year insurance replacement market, which is dominated by Allied Carpets. Carpetright has only just moved into the sector, but a new deal with Halifax insurance services looks potentially lucrative. More such deals are likely.

The other driver of growth is the Harris at Home stores. As well as targeting the higher end of the market, these stores run a home shopping service operated out of a fleet of vans. The company visits with a range of samples and measures up the home. So far there are 32 vans, mostly in the South-east, with modest expansion expected.

The downside with Carpetright is sensitivity to the economic cycle and the housing market in particular. However, the company said 90 per cent of its sales are replacements and not related to house moves.

The balance sheet is also strong, with £15m of cash at the year-end. About £7m has been spent on freeholds since. These deals give Carpetright a valuable revenue stream from rents, because it typically buys several units on retail parks as well as its own sites.

The shares have had a good run-though: they fell 7.5p to 592.5p yesterday. On Deutsche Bank's current-year profit forecast of £52m, that puts them on a forward p/e of 12. A solid hold backed by a good yield.

Why would a billion-pound company have to make a £9.1m acquisition in shares? Amey, the construction and support services group, boosted its technology division yesterday with the purchase of Crown, a web design and IT services business. The two already work closely together, and the low initial consideration is accompanied by a big incentive package for Crown's management, under with Amey will probably pay upwards of £25m in total, depending on results.

The acquisition is a good fit, but the dilution effect of the share issue sent Amey stock down 13p to 366p. That the consideration was not paid in cash served also to highlight Amey's meagre cash flow compared with its peers.

That is the root of the bear case that has kept Amey away from its May high of 433p. Investors have been right to adopt a new mood of caution, given Amey's need to restate previous years' figures to account more conservatively for the costs of bidding for private finance initiative contracts. There remain concerns about the extent of outstanding debts.

Even now, the stock is on a forward p/e of 24. That comes amid high hopes for the Government's plans to welcome private contractors into the heart of health and education services. Amey is also a preferred bidder in talks on the privatisation of the London Underground. Yet Amey has less room to manouevre than the sector's giants, such as Serco and Capita.

Top-line growth has satisfied most of the doubters, but with several big contracts up for renewal soon, Amey's rating doesn't take sufficient account of the risk. Sell.

Helphire has some serious bruises from its fight to establish itself in the booming personal-injury market.

The company supplies hire cars to drivers involved in accidents that aren't their fault, then claims the costs back from insurers. But it learnt the expensive way that in such a David-and-Goliath battle, the insurance giants tend to win. Most of the UK's multimillion-pound insurers refused to pay up, taking the company to the brink of bankruptcy.

The company reached an "amicable" arrangement with its adversaries last autumn, in which insurers paid roughly half of the £103m in outstanding claims. This has left Helphire with losses of £52m for the year to March, but it has room to pursue new business. Helphire is likely to go back into the black in the next six months.

Yesterday its shares fell 1p to 77.5p after a hyper-cautious auditor's note on the figures said the company could, theoretically, violate banking covenants. A worst-case scenario could be that it fails to win back a further £19m of costs.

But this is highly unlikely. More plausible is that the new friendliness with the insurance industry will see more business coming Helphire's way. A return to profit of £1.2m in 2002 could be just the beginning. A good bet.