There are not many house-builders selling at a discount to net worth, but Swan Hill is one of them. Not only is the discount a substantial, and unjustifiable, 38 per cent, but there are also bid rumours doing the rounds.

Net assets at the last year-end were worth 129p a share. The current price is 80p. That Swan should be trading at these levels, considering the changes chief executive John Theakston has wrought at the company over the past few years, makes little sense.

A few years back, Swan used to be a pure commercial property operator, building office and retail developments and making money by letting and leasing the space.

Theakston figured there was more money to be made in the residential housing market and systematically set about changing the company's focus.

Now Swan is something of a specialist in building 'higher value' quality homes in the south of England, where prices are at their highest. In calendar 2001, Theakston's company was able to post pre-tax profits of £6.1 million (£2.3 million) on turnover of £77.6 million.

The housing division accounted for £56 million of sales and operating profits of £7.3 million, slightly below that achieved in 2000, as operating margins returned to what were described as 'more normal levels'. The commercial property arm chipped in with operating profits of £2.4 million.

During the year, 259 houses were sold. Theakston is confident the number will be higher this year. By March, Swan had 16 different housing sites open for sale and 11 others under construction.

Since then, five more housing sites have opened for sale and two others are nearing that stage. Already, Swan has taken exchanges and reservations to the value of £32 million, up from £28 million this time last year.

The winding down of remaining commercial property activities continues apace. Of the two major remaining sites, there have been further lettings at Stockton-on-Tees, while the French retail park is likely to be sold or developed on a joint venture basis. Around £14 million was ploughed into these activities last year and Theakston remains confident that 'we will recover almost all of our original outlay'.

The only real concern that investors might have about Swan Hill relates to the future of the housing market. After the recent boom in prices, many experts expect some form of correction or slowdown.

Theakston remains unfazed. He says: 'We entered this year with a range of sites across the south that had an estimated sales value of £150 million. Margins have come back a bit. I expect that if there is a correction it will be in the form of house price rises cooling rather than prices falling. We have had price rises of around 5 per cent per year on average. In this low-inflation/low-interest rate economy, I would rather see rises of the order of 3 per cent per year.'

Broker Brewin Dolphin expects Swan to post profits in the region of £7.5 million this year, which should translate into earnings of 9.4p per share. For 2003, profits of £8.7 million have been factored in, with earnings of 10.6p.

With gearing standing at just 33 per cent (low for a property company), and cashflow strong, Swan stands as one of the more robust property ventures on the market. Particularly in view of the bid talk. Worth buying.