The Investment Column: Woolies won't have any wonder unless there's a takeover soon

Fibernet; Vislink
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The Independent Online

Woolworths posted another set of poor annual results yesterday and once again its management seemed to blame it on the inheritance it received when the retailer was demerged from Kingfisher. Profits at the group slumped to £57.7m from £68m in the previous year. The performance of its key retail division was particularly weak. There, profits slumped from £40m to just £17m.

Trevor Bish-Jones, the chief executive, argues that Woolies suffered years of underinvestment during Kingfisher's stewardship - it even sold the group's remaining properties leaving it with just two freeholds out of 806 stores - and complained that the company is still suffering. To remedy the situation he plans to pump £90m into the business by refitting stores, reforming the distribution network and putting in place more efficient IT systems.

Separately, in an attempt to grow the top line, he wants to roll out "a multichannel retail offering" which will allow consumers to order a larger number of products online or in store (as at Argos).

However these measures, which should have been introduced some time ago, do not solve the fundamental identity crisis Woolies faces. In recent years it has attempted to carve out a niche as a one-stop shop for mothers. But it is up against increasing competition from supermarket chains such as Tesco who, each year, offer more of the products sold by Woolies. This allows mums to buy toys, clothes, videos and sweets for their kids while doing the weekly food shop, thereby avoiding a separate trip to Mr Bish-Jones's stores.

Yesterday's results would have been even worse had it not been for a solid performance by Entertainment UK, a wholesale business that supplies CDs and books to the likes of WH Smith. Here profits increased 15 per cent.

There is little doubt that the majority of Woolworths shareholders wish Apax had succeeded when it tried to buy the company last year. The private-equity house considered making a 58p a share offer. Since then Baugur, the Icelandic investment company, has built up a 10 per cent stake, sparking rumours that it might soon go the whole hog and bid for the entire company.

This is certainly a possibility. Woolies' solid cash flows mean Baugur should have little trouble raising the financing for such a deal but anyone hoping for an offer near the level offered by Apax will be very disappointed. Without a takeover, Woolies shares are unlikely to rise any higher than yesterday's closing price of 35.25p. In fact, given the tough trading conditions on the high street at the moment, they could well lose more ground and are therefore best avoided.


There was more bad news for shareholders of Fibernet yesterday. The telecoms group warned its full-year results would not live up to expectations after it failed to win enough new business during the second quarter. As a result analysts slashed their forecasts and now predict Fibernet to register earnings before interest, tax, depreciation and amortisation of just £17.5m this year compared with £19.7m previously.

The group offers large companies their own private networks for high-speed transfer of data using its fibre-optic cable technology. The next two years are crucial for Fibernet's goal of achieving sustainable profitability. However, going by yesterday's announcement, the outlook is far from bright.

The telecoms industry is a fiercely competitive place these days and prices are falling constantly. How Fibernet plans to compete against big beasts such as BT is unclear. Its business is also under attack from next-generation technology such as that which allows voice and large amounts of data to be transferred over the internet. The 50 per cent discount to the wider sector at which Fibernet shares trade is warranted. Sell.


Vislink is a global leader in the provision of microwave and satellite broadcast systems to the television industry, the emergency and military services, and mobile phone companies. Government buyers are increasingly turning to "commercial off-the-shelf" sources for high-technology systems rather than spending budgets developing and manufacturing their own systems. The group is benefiting greatly from this trend.

Yesterday, it unveiled a rise in annual pre-tax profits to £6.4m, up from a £300,000 loss in 2004. Much of this was thanks to a deal with Nextel which saw the US mobile phone operator acquire space on the 2 gigahertz bandwidth, of which Vislink owns two-thirds. The agreement gives great visibility to the group's earnings through 2006 and 2007. However, the company still has some work to do to convince investors its UK business will one day be profitable and that it can disentangle itself from a high-risk Venezuelan broadcasting contract.

Nevertheless, these negatives are likely to be outweighed by increasing orders from the outfits such as the US Department of Homeland Security which could well prompt upgrades to the company's profit estimates Trading at a little less than 15 times forward earnings, the shares are not expensive and are worth a punt.