Fraser could offer stags a field day: Transformation of the stores sector's ugly duckling into a swan could be easier than expected, says Quentin Lumsden

DIVIDED City views on the prospects for House of Fraser shares add to their attractions - an opportunity for private investors to make a quick profit from 'stagging' the issue.

This chain of department stores runs from Arnotts in Inverness to Dingles in Plymouth and takes in Army & Navy, Binns, Dickens & Jones, Rackhams, Dingles and House of Fraser stores. But Harrods is not part of House of Fraser.

Attractive new issues usually end up being hopelessly oversubscribed, leaving investors with a pitiful allocation.

In this case there is a good prospect of both a premium in opening dealings and receiving a worthwhile allocation.

There is also a respectable case for retaining the shares in the hope that a mostly new management team will improve returns on what has historically been a neglected operation lacking focus and retail excitement. But there are no shareholder perks on offer as an incentive.

Against earlier speculation that the business, which is being sold in its entirety by the Fayed famlly, might be valued at pounds 500m, the capitalisation at the 180p offer price is pounds 413.3m for a historic p/e of 16.2 on profits before exceptional items, with a dividend yield of 3.5 per cent.

Applications close on 25 March with a minimum application of 200 shares costing pounds 360. A quarter of the issue is available in the public offer. Dealings will begin on 6 April.

The bearish case, brutally put, is that even by the lacklustre standards of the department store sector House of Fraser is a poor performer, with such abysmal sales per square foot that it is hard to justify opening new stores. The sharp rise in profits that has been achieved in the years leading up to the flotation reflects closing unprofitable stores and falling interest costs on group borrowings.

The number of stores has dropped from 110 to 56 in the past 10 years, with most of the reduction weighted to the recent past. The business looks to some like a dinosaur in the retailing environment of the 1990s.

But not everyone takes such a gloomy view. The flotation has some of the characteristics of a privatisation and may lead to a similar improvement in performance.

In relation to its size, with turnover of pounds 722m,investment of pounds 120m over the past seven years is a modest figure suggesting that the business has been neglected.

Equally, the group has a valuable portfolio of stores in prime positions all round the country, mostly held freehold or on long leasehold, so that rents are only 2 per cent of turnover.

A more focused approach to retailing helped by modern information systems could bring about a substantial improvement in profitability. One analyst is looking for profits to grow at a 23.5 per cent compound rate over the next two years.

On those projections the shares are much cheaper than those of the recently floated Allders business, yet the projected growth rate is twice as rapid.

Later in the 1990s consumer spending should perk up. House of Fraser may have more potential to make the transition from ugly duckling to swan than the doubters allow and looks well worth stagging.

Enthusiasts firing off applications for all the family, though, should keep in mind the possibility of another interest rate broadside from the US Federal Reserve which might spoil the fun, if only temporarily.

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