Shares in Lord Harris' Carpetright are looking a bit threadbare after a disappointing set of full year figures.
The company has fallen 64.5p to 645.5p - a 9% decline - as analysts rushed to issue sell notes following the latest update. Carpetright said total revenues had risen 7% while profit before tax was up from £16.7m to £22.3m, although a doubled dividend of 8p fell short of expectations. The company has moved into the insurance replacement business and has won three contracts, but the house builder market has proved more tricky, with minimal sales due to long lead times in developing new homes.
Overall Lord Harris said he expected consumer demand across Europe to remain subdued but maintained the company was confident about the future when economic conditions improved. Analyst Matthew McEachran at Singer Capital Markets said:
These figures are marginally disappointing and although the dividend has doubled this is still 4p short of management original guidance before Christmas reflecting caution about the year ahead. There may be some downside risk to forecasts on the back of disruption to trading after the election and as housing activity slows short term. Although the shares would be trading on 11.6 times on our forecasts, the real multiple could end up higher than that if contract revenues are slow to develop. Nonetheless a premium to the sector of 30% is fully warranted so the shares may be fairly valued around these levels.
At Oriel Securities, Ramona Tipnis issued a sell recommendation:
The final profit before tax outcome however, is at the lower end of the range for consensus (consensus £27.2m to £32.3m and Oriel on £27.3m). Within these numbers the UK with an underlying operating profit of £26.2m (Oriel £27.4m) is worse than we expected with the Benelux better at £9.6m (Oriel £7.0m). There is no outlook statement, but consumers are likely to continue to be cautious with regards to big ticket items and we are not changing our forecasts at this point. Our bottom of the range forecasts put the stock on 21.1 times April 2011 earnings and with a yield of just over 2% and uncertain outlook there is not enough to justify the multiple and we retain our sell recommendation.
Freddie George at Seymour Pierce also advised clients to sell the shares:
We are concerned that the housing market is beginning to stall as evidenced from the latest data and mortgage volumes, which are a key driver of carpet sales, are slowing. There will also be a negative impact on revenues from a VAT increase to be introduced at the beginning of the year.
We reiterate our sell recommendation on the stock. On the basis of our revised 2009/10 pre-tax profit forecast, the stock is still highly valued and rated at a significant premium to the general retail sector. The benefits of capacity, in our view, coming out of the market have been fully factored in the share price. We continue to prefer United Carpets, which has been more conservative with its forecasts.
