The Investment Column: Time to plug into Premier Farnell as overhaul shows signs of working

Lookers; Carluccio's
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The Independent Online

Current price: 173p (+6p)

Our view: Buy

It has been a long cold summer for the electric components group Premier Farnell, but, as its three-year overhaul begins to show signs of flourishing, investors prepared to lock in could well reap the rewards.

Yesterday, Premier signalled its intention to expand operations in India. The shares were up 6p to 173p after it signed a letter of intent with Hynetic Electronics to buy its distribution business in the country. The companies have a relationship going back seven years, with Hynetic acting as an authorised distributor of Farnell's products.

While this is a small takeover – Hynetic has eight sales offices – it was seen as an important symbol of its intentions to expand in the country. Analysts described the move as an important symbolic move. ABN Amro pointed to research by Avalon Consulting that suggests its target business of high-service and small-volume distribution is expected to triple in India over the next five years.

This "internationalisation" of the business forms part of a three-year re-focusing strategy first announced by chief executive Harriet Green last October. Other high growth markets it has targeted include China, where it launched Premier Electronics in April, and Eastern Europe.

The three-prong transformational strategy, announced after an indepth business review, also included heavy investment in sending more of the company's business over the internet, which is already gaining traction. It is also placing more emphasis on the less cyclical electronic design engineer business over its traditional maintenance, repair and operations arm.

The stock has suffered in the past six months as the credit turmoil struck, shedding almost a third of its value. The group, however, put out a solid first half results statement in September saying it had boosted pre-tax profit 14 per cent despite the challenging market conditions. While its earnings per share had fallen to 2.6p from 5.9p after losses from discontinued operations, it trades on a multiple of 13.4 times January 2008, which looks pretty cheap especially when compared with rival Electrocomponents. There is also a solid 5.4 per cent dividend yield on the stock.

While there are still two-years to go of its strategy Premier is sounding confident it can shake off its legacy of underperformance, and despite the shares rebounding from a two-year low late last month, it might be the right time to plug in. Buy

Lookers

Current price: 143p (+5.25p)

Our view: Hold

Lookers received a favourable response yesterday to the announcement of the purchase of rival car dealership Dutton Forshaw from Lloyds TSB Asset finance. The £60m paid (including debt) might not on the face of it look cheap for a business that made only £3m in profit last year. But Dut-ton has substantial assets (including £40m of freehold property), strengthens Lookers where it is weak and will deepen its relationship with newer suppliers such as Ford and Mercedes-Benz. According to the company, the car makers are on board with the deal (important), the analysts are too (also important) and so, it appears from the share price, arethe investors (crucial). Trouble is, with fears that theongoing credit crunch will eventually filter into the "real" economy, would anyone want to buy into a car business?

Well, in Lookers' favour, it has lots of customers on the sort of deal that has them paying fixed monthly payments for three years, at which time they need to buy a new car. It has also, sensibly, diversified through its sizeable parts distribution business that accounted for around 50 per cent of gross profits before yesterday's deal. The rationale for this is that if people stop buying new cars, they will not stop needing parts and may ultimately have to buy more as their ageing motors go bad.

Because the deal was completed after September, it will dilute earnings for Lookers shareholders in the short term and Dresdner Kleinwort has the shares on a pricey looking 13.9 times full year 2007. That, however, falls to a comparatively inexpensive 9.8 times 2008. That will look even cheaper if Lookers can capitalise on the turnaround potential that Dutton offers. Still, while car sales have held up this year, the company may suffer in the event of a consumer slowdown with sentiment also working against the price. So Hold for the moment.

Carluccio's

Current price: 198.5p (-1.5p)

Our view: Hold

If consumers are cutting back on discretionary spending such as eating out at restaurants, Carluccio's is certainly not feeling the pinch. Sales over the past year were up 18 per cent, the company said yesterday, buoyed in part by an expansion programme that has now boosted the company's outlets to a total of 32. The company is also bullish about the coming months, with further openings planned.

Since its stock market debut two years ago, Carluccio's has won plenty of support for its unique business model – its outlets offer a menu from founder Antonio Carluccio, but also feature coffee shops and also sell a wide range of Italian cooking ingredients.

However, there is now some scepticism about Carluccio's scope for expansion. Of its existing sites, just one is further north than St Albans. That restaurant, in Manchester's Trafford Centre, will soon be joined by another site in Manchester city centre and a further development in Leicester.

Analysts wonder how well the Carluccio's model will translate to areas beyond the South-east of the country. That may reflect London-centric snobbery about the sophistication of their Northern counterparts, but it's certainly fair to say that Carluccio's has not yet proved it can succeed nationwide.

Analysts at KBC Peel Hunt are also nervous about the valuation, pointing out that Carluccio's shares currently trade on a ratio of 27 times estimated earnings for 2008. If northern customers turn up their noses at the Carluccio's menu, that rating may turn out to be as frothy as the company's best cappuccinos. Hold.

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