We appreciate it is bad form to profit from the hardship of others. That said, the clouds that have brought mass flooding to parts of the British Isles in the past month have come with a bright silver lining for caravan retailer Discover Leisure, with the poor summer weather actually resulting in more visits to Discover’s retail sites.

Demand for temporary accommodation has created a new sales outlet with Norwich Union, for instance, buying 200 of Discover’s caravans to house flood-affected residents of Hull. And, given that large numbers of caravan sites are located close to rivers, the company is expecting a new source of demand as caravan owners get around to replacing homes damaged by water.

All of this is pointed out in a note from the company’s broker, Panmure Gordon, which recently raised £20 million for Discover to fund its £24 million purchases of Barrons Holdings, Britain’s leading caravan retailer, and the smaller Mendip Caravan Centres.
Discover is now the undisputed number one in the industry with a 14 per cent market share. And Panmure reckons that the synergy gains from the two deals, plus their possible impact on margins, will have a transforming effect on earnings.

If that were not enough, the two deals have left Discover sitting on nearly 42 acres of freehold land up and down the country. The stated value of the property is £12.4 million. But that is on an existing-use basis. Panmure reckons that alternative use values could push the figure over £20 million. At the current 27p, Discover is valued at just below £42 million. The property is good underpinning for the shares and it gives Discover’s management new flexibility in its borrowing plans.

Discover is the leading consolidator in the caravan retailing market. The synergy gains from the latest deals are reckoned to be £1.8 million a year, half of that coming from reduced costs, the other half from improved performance. But, on top of that, a widening of margins could add anything from £1.5 million to £3 million to profits over time, says the broker.

Even without factoring in the effect of better margins, Discover looks set to generate a profit of £3.5 million in the coming year (to end-August 2008) for earnings of around 1.5p a share. The following year, says Panmure, profits should hit £4 million for earnings of 1.8p a share. Clearly, if Discover’s management can get margins up as well, those forecasts will start to look very tame.

As it is, Panmure reckons the shares are selling for around 18 times 2007/08 earnings and around 15 times anticipated 2008/09 earnings. With obvious scope for upgrades, Discover looks an interesting lockaway.