Bottom Line: Premium on Fraser

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The Independent Online
WITH recent flotations Maid, Capital Shopping Centres and Chiroscience all trading well below their issue price, Warburg will be pleased to have rung up a 6p premium yesterday on the House of Fraser offer.

At 180p the float valued the Army & Navy to Dickins & Jones store chain at pounds 413m, well below early forecasts of a pounds 500m price tag. In the event it was a correct reading of the market's jittery runes.

Investors are finely divided on whether House of Fraser is a down-at-heel example of a low- growth retail formula or a genuinely cheap issue at an unfair discount to its sector.

Both arguments have their merits. By the standards of its peers the shops generate abysmal sales per square foot: House of Fraser pounds 144 compared with John Lewis's pounds 350, for example.

On the other hand, the poor existing return gives new management something to aim at and they are confident better targeting of merchandise and a better mix of full and part-time staff can further boost recent improvements.

House of Fraser also has demographics on its side, with its target market of affluent 35 to 64-year-old female shoppers poised to grow strongly over the next 10 years.

Certainly, the rise in operating profits from pounds 20.4m to pounds 43.9m last year, reflecting an improvement in margins from 3 to 6.2 per cent, suggests the untested team should be given the benefit of the doubt.

On forecasts of pounds 45m pre-tax profits in the year to January 1995 and earnings per share of 13.1p, the shares trade on a prospective price/earnings ratio of 14. That compares with 19 for Marks & Spencer and Sears, 17 for Storehouse and 16 for Kingfisher. The doubts will persist, but that undemanding multiple should ensure House of Fraser avoids the fate of more optimistically priced peers.