US exposure may hit HSBC

British Vita is a soft hold at best; Nestor Healthcare still needs nursing along

As anyone who has seen adverts from "the world's local bank" knows, behaviour has different meanings in different countries. In the global world of finance, though, unexpected rises in costs always mean bad news. In HSBC's case, it meant analysts took a hacksaw to profit forecasts for 2003.

The bank – the largest quoted in London – missed market expectations for 2002 profits yesterday. Spending increased sharply in the second half , it said, with £76m going on the move into its swish new head office in London's Canary Wharf. There was also a £45m write-off because of its ill-fated foray into the "mass affluent" market which began as a joint venture with Merrill Lynch and now lies almost defunct.

The day was only rescued because HSBC had good news on the bad debt front. Having taken the pain of a $1.1bn (£700m) provision against Argentina's economic woes in 2001, Sir John Bond, its chairman, said he didn't feel the need for any more of a cushion. Overall, bad debts fell $716m to $1.32bn.

HSBC's shares shuffled up 5p to 689p and the bank does deserve a couple of cheers for having grown profit by 20 per cent, when its major UK rivals have seen their earnings drop. The trouble is, it is difficult to have confidence either in the trading outlook or the wider strategy.

The big unknown is how its $14bn acquisition of Household International, the US consumer finance giant, will bed down after the deal is completed later this month. HSBC's US business previously consisted of unexciting deposit accounts, and the hope is that these customers can be sold Household loans. It is a risky proposition, since most economists are arguing that the US consumer needs to cut their debt, not take on more. If the country's economic recovery stalls and unemployment rises, Household's speciality in lending to the poor might become a serious millstone as customers default on credit cards and loans.

The Household deal ups HSBC's exposure to the US at the wrong moment, and reduces the relative importance of the traditionally fast-growing Asian market, on which the bank's elevated share price has been based. With the global economic uncertainty continuing to mar the outlook for revenue growth, HSBC's substantial premium to other UK banks looks unjustified. Sell.

British Vita is a soft hold at best

Cushions, duvets, sound proofing, the spongy bit inside ink jet cartridges, anti-explosion fuel tank linings ... the products for which British Vita makes foam cover the manufacturing spectrum.

It is all fairly low margin stuff, and many markets are heavily dependent on the economic cycle, but the company has been doing pretty well considering the economic downturn. Sales fell slightly in 2002, to £894m from £911m the year before, partly because of some judicious business disposals but mainly because of the sluggish growth of its manufacturing customers. And yet the group was able to trumpet pre-tax profits, before goodwill and a one-off gain, up 7 per cent.

The reported pre-tax figure, £110m, was nearly double the 2001 result because British Vita sold some of its holding in Spartech, a US sectormate. That sale raised £100m and should fund share buy-backs for the remainder of this year. The cash flows of the group have also been particularly strong, and the dividend was raised 5 per cent. The yield of about 5 per cent is not under threat.

Is it enough to sustain interest in the shares? They were up 8p to 218p yesterday, but there are a number of reasons to be cautious. There is no sign of an upturn in demand and the group's exposure to Continental Europe may serve it ill this year. David Campbell, chief executive, also flagged a number of big extra costs yesterday. The insurance bill will rise by £3m, and the group is prudently putting more money aside for the pension fund (which, unlike many, remains in surplus).

Analysts expect a lower contribution from Spartech in 2003, and British Vita also flagged another year of volatile raw materials prices. The cost of polystyrene and PVC appears to be rising again, and other plastics look likely to increase in price later this year.

The price-earnings multiple of 10 on CSFB's forecast of earnings for 2003 points to a hold recommendation for now, but investors need to position themselves close to the exits.

Nestor Healthcare still needs nursing along

A year ago, we told investors to avoid Nestor Healthcare shares. While it was the biggest agency for supply nurses and home helps, a new national database of NHS professionals looked set to reduce the service's dependence on the private sector. And there was the risk it would lose a lucrative contract to test former miners for disability benefit.

One year on, both came to pass and the shares are now a third of their previous level, but there could still be better times to pick up the stock.

Annual results yesterday were mixed. Pre-tax profits were down 48 per cent in 2002, because of a £15m write-off due to the loss of the miners contracts. But stripping out this and other one-off restructuring charges gives an underlying rise of 38 per cent in profits.

For the time being, NHS Professionals has had a mildly positive effect. There are fewer regular contracts to place staff, but now the NHS is relying on Nestor nurses to plug last-minute gaps, and that means Nestor can charge more. But the database is still being rolled out, and is having teething troubles of its own, and it remains a big source of uncertainty for Nestor.

More promising is its work providing home helps to local authorities, and its newer business providing out of hours cover for GPs. The new contract that GPs have been offered by the Government allows them to opt out of night duty, so Nestor should get more work.

Nestor is well placed to grab opportunities in the NHS, but the service's relationship with the private sector is still in flux. The company warned of another challenging year as it continues to cut costs. A price-earnings multiple of eight looks low but there are risks to forecasts for the first half of 2003. Hold.