HOUSEBUILDING stocks had the rare sensation of being on the front foot yesterday after the extended gloom in the sector. The partial rebound came courtesy of a note from broker Credit Suisse, which said housing shares looked attractive and could rest
ore returns in the long run that are currently devastated.
Ahead of underlying losses of £50m-plus expected at one of the main players, Redrow, next week, one could accuse the broker of donning the rose-tinted spectacles prematurely.
But Credit Suisse is no maverick in adopting this new take on the bombed-out sector. There is a growing feeling that the housing market, following a string of summer trading updates from leading players, is beginning to show momentum again.
At the very least the downturn in prices and demand has stabilised. And some players, like Persimmon, have spoken of a return of green shoots of confidence if not of housebuying activity.
Credit Suisse said: "We believe that the industry has not structurally altered and thus, in principle, see no reason why it should not return to historical levels of margins and returns."
Those margins at the high-tide mark, before the housing crash, were often in the high-teens. So it is easy to see why investors would be excited at the earnings potential if Credit Suisse was right medium-term.
Barratt Developments led the gainers yesterday, the stock closing up 6 per cent at 248.20p. Redrow lifted 4 per cent, while Persimmon gained 3 per cent, and Bellway and Bovis were each up about 2 per cent.
One can see Credit Suisse's point. The demand for new housing, given the UK demographics, has not changed.
When eventually the credit freeze and the lack of mortgage availability eases, the same underlying demand will be there.
Nationwide recently reported the fourth monthly rise in a row in house prices. Admittedly this is from a low base. But you could argue that it is shrewder for investors to get in at the bargain-basement for housing-stock picks, rather than wait for the recovery to show unmistakable impetus, by which time the opportunity for real stock market profit will have passed. As financier Sir James Goldsmith once said, by the time you hear the bandwagon it is too late.
Repossessions are also lower than some doomsters had predicted, probably due to record low interest rates preventing a torrent of cheap properties coming onto the housing market.
Credit Suisse now predicts peak-to-trough house price declines of 30 per cent, compared with its previous estimate of 35 per cent. The broker has also pencilled in 10 per cent growth in housing volumes next year as builders focus on prices.
Crucially, many now believe that worst-case scenarios for the housing sector on rising unemployment in the recession, plus lack of early improvement in mortgage availability, are already factored into builders' share prices.
The bulls also say major sector restructuring has now already been done, so the housing industry is leaner and fitter for any upturn.
Technology mattersTHE threatened closure of the Bausch & Lomb contact lens plant in Livingston is another blow to Scottish manufacturing which highlights the need for factories to be super-efficient if they are to remain competitive, writes Terry Murden.
The company has poured millions into Livingston, investing in new equipment to make it more productive, but it has still been unable to make it pay. The end result is a stark exercise in number-crunching. As Jerry Ostrov, the chief executive, said yesterday: "We have three plants and we need two."
The significant point here is that the two other plants, in Ireland and the US, are integrated with research and development and other manufacturing. It makes them more cost-efficient.
The shutdown of Livingston is also a disappointment to entrepreneur Ron Hamilton who launched the original Award company in 1993 with investment from Scottish Development Finance, the venture capital arm of Scottish Enterprise. It saw a tenfold return on that initial £450,000 when the business was sold in 1996.
Calum Paterson, who now runs the spin-off company Scottish Equity Partners, shared Hamilton's disappointment. He has subsequently invested in his new contact lens venture, Daysoft, in Blantyre which has a different business model based on direct selling through the internet. While B&L employees stare redundancy in the face, Daysoft is growing and recruiting, an example of how keeping pace with technology is vital to survival.
Bryan Johnston of Brewin Dolphin
ONE TO WATCH
Clapham House
76.5p unch
Scotsman says BUYRESTAURANT group Clapham House (CPH) has two divisions: Gourmet Burger Kitchen (GBK); and Development brands. One of its "development brands", the Bombay Bicycle, has been sold while Tootsies will almost certainly follow suit; the future of the Real Greek is also uncertain.
Life is pretty tough for the restaurant industry but the GBK brand has a high profile. In July, CPH reported an increase in revenue of more than 16 per cent to £62 million, a pre-tax profits figure of £4.1m and earnings per share rate of 0.9p. The balance sheet has been improved, with debt down to £16m, although the value of Tootsies has been written down aggressively.
CPH confirmed trading conditions are not dissimilar to the recession in the early 1990s. The consumer has retreated into his/her wallet/purse, with many of CPH's peers now under pressure.
Investing in a restaurant company while in the teeth of a recession looks of dubious merit. However, CPH is a survivor and the collapse in the share price from a peak of more than 400p in mid-2006 to current levels seems to acknowledge most of the challenges. There appear no serious balance sheet issues, although nor is there much prospect of a dividend payment.
An investment in CPH is conditioned on one's views on the longevity and depth of the current recession. Evidence suggests it is the cheaper high street eateries that are suffering, the actual footfall migrating to better quality establishments even if many are relying on takeaways instead. For those who believe in a looming economic Armageddon, CPH's shares should be avoided like salmonella, but anyone prepared to take a rather more optimistic view of prospects two-years out could well consider taking a further look at the shares.
• The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.
Frontera raises £3.7m and march into Georgia
SMALL BUT BEAUTIFULFRONTERA Resources, the Aim-listed oil and gas explorer and producer, yesterday revealed it had raised $6 million (£3.7m) through a private placing of shares and warranties.
All the money will be used to fund the oil and gas development programmes in Georgia.
New drilling operations in the "shallow fields production unit" are scheduled to begin within the next three months and are planned to be completed by the year end.
Frontera believes these work programmes will increase daily production to as much as 1,000 barrels of oil equivalent per day.
The company – which has a market cap of about £7m – issued 35.8 million "units", each consisting of one share and one warrant to buy another share at 15p within the next two years.
The issue price was 10.3p per unit, representing premiums of about 31 per cent and 41 per cent over the ten- and 30-day trailing average share prices.
Steve Nicandros, chief executive, said: "The proceeds will permit us to advance work at the shallow fields production unit where anticipated results are expected to provide us with increased cash flow generation going into 2010."
Comments fuel rises in oil sector
SCOTS STOCKSOIL prices fell yesterday but Scottish oil and gas companies were on the rise following positive comments from analysts.
Cairn Energy and Bowleven were identified among Royal Bank of Scotland's picks of the sector. The vote of confidence boosted Cairn, which was up 30p to 2,419p, but Bowleven was left unchanged at 84p.
Fellow oil and gas explorer Melrose Resources stormed ahead with a 6 per cent or 19.5p rise to 339.5p, while Ramco Energy gained 1.5p to 54p and support services firm Wood Group rose 5p to 286.9p.
Johnston Press, the owner of The Scotsman, benefited from UBS's prediction that newsprint costs will fall by 10 per cent in 2010, compared with a previous estimate of 3 per cent. Shares in Johnston Press closed up 15.5 per cent or 4.75p at 35.5p.
Stagecoach added to Thursday's gains, rising 3.1p or 2.1 per cent to 149p, after the Perth-based transport group announced it would buy parts of National Express if it was taken over by a consortium consisting of the Cosmen family and CVC Capital Partners. Aberdeen-based rival FirstGroup shed 4.8p to close at 372.8p.
John Menzies surrendered Thursday's gains and closed down 8.25p at 344.75p.
Dunfermline-based Optos, which makes eye scanning machines, continued its climb, ending the day up 3.2 per cent or 2.75p at 89.75p.
Financial stocks were also on the rise yesterday, with insurance and pensions giant Standard Life joining in the surge, up 2.6p at 194.9p.
Aberdeen Asset Management added 2.9p to close at 133.2p, while Alliance Trust ended up 4.2p at 293.8p.
