Built on rock, not sand

Another fine set of results was cold comfort for shareholders in Wilson Bowden, the housebuilder. Despite the superlatives showered on the company by analysts, its shares, which have fallen by 43 per cent since the beginning of last year, could only bounce by an anaemic 4p to close at 326p.

The market's lack of enthusiasm certainly has nothing to do with the figures produced yesterday. Sales grew by an impressive 31 per cent to £241.7m, profits jumped 44 per cent to £37.1m, and after an increase of a fifth in earnings per share to 27.1p, the dividend was up 8 per cent to 10.05p.

Margins continued their strong rise since bottoming out in 1992 in the midst of the housing downturn, adding 1.5 percentage points to reach 15.7 per cent. House completions broke through the 2,000 mark for the first time. But the good historic news was tempered by more than the usual dose of prudent caution from David Wilson, chairman and chief executive. Prices are likely to remain flat this year, which will put the squeeze on margins already under pressure from rising building costs and land prices.

Mr Wilson sees a 10 per cent fall in the cost of land this year, underlining the silly prices paid by many builders last year for what is their biggest single cost. To make matters worse, volumes are extremely patchy, with good progress in some parts of the country undone by sluggish sales elsewhere.

There should be little surprise about that gloomy prognosis. Interest rates are rising, the benefit of mortgage interest relief has been cut and will be shaved even finer next month, and the safety net of guaranteed mortgage payments for unemployed people was taken away in the last Budget.

That is hard luck for a company which has handled the longest recession since the war with great aplomb. Even in the worst of the market, return on sales never dipped below 13.5 per cent and the balance sheet has remained strong throughout with gearing at the end of 1994 a negligible 7 per cent.

Maintaining a land bank of more than 10,000 plots, or five years' supply, meant that Wilson did not have to buy inflated land last year, and it wisely shelved £20m of acquisitions pencilled in for the second half. Focusing on large four and five-bedroom houses pushed up the average sale price and boosted margins.

The downside of that record is that there is little left to go for if the market remains subdued, as it seems almost certain to do this side of a general election. Wilson Bowden is a first-rate company but it is operating in a highly unforgiving market.

If you believe that the market has overdone its legitimate concerns, however, a prospective p/e ratio of 10.6 on forecast profits of £41m this year is undemanding relative to the market. A historic yield of 3.9 per cent underpins a safe stock in an extremely out-of-favour sector.